Pound Sterling "Whacked" by Euro and Dollar on News May is to Return to Brussels for Further Negotiations

Image © Mike Chodyra, Adobe Images. 

- May to make statement to parliament at 15:30 GMT

- Sterling dips on news Brexit vote in parliament is off

- ECJ rules UK can stay in European Union

- ECJ Ruling to weaponise stance of remain-leaning MPs

The British Pound fell sharply at the start of the new week on headlines in late morning trade in London that the government is to abandon a vote on the EU-UK Brexit deal, originally scheduled for Tuesday.

In a statement to the House of Commons Prime Minister Theresa May says after three days of debate the government has pulled the vote on the Brexit deal rather than risk splitting the House.

"I've listened very carefully to what has been said in this chamber and out of it from members of all sides," says May, "while it is clear there is broad support for many aspects of the deal, on one issue, the northern Ireland issue, there is widespread concern."

"We will defer the vote," says May saying she would confer with European leaders and leaders of the European Commission to work "seek additional reassurances on the backstop."

According to a report in the Telegraph, May will return to Brussels to secure a "legally binding assurance" that the UK won't be trapped into any form of backstop indefinitely.

Markets are wary that May is running a fool's errand in going back to the European Union with such a request and as such the prospect of a 'no deal' Brexit has risen; such an outcome would be destabilising to the UK economy and its currency. 

The market has reacted sharply to the developments: The Pound-to-Dollar exchange rate is down 0.75% at 1.2621, the Pound-to-Euro exchange rate is a more substantial 0.82% lower at 1.1065 ensuring the market is now trading at fresh three-and-a-half month lows.

"Cable is getting whacked," observes Neil Wilson, Chief Market Analyst with Markets.com in the wake of the headlines. "May seems to have accepted she had no chance of winning and is seeking to save her premiership by some last minute brinkmanship. Sterling remains at the mercy of highly sensitive news flow around Brexit and this morning has been a case in point."

"The political uncertainty has seen the UK Pound Pound dip below $1.27," says Economist Shaun Richards.

"GBP weighed down by lashings of Brexit uncertainty," says Robert Howard, an analyst on the currencies desk at Thomson Reuters, referencing "reports about the Commons Brexit vote scheduled for Tuesday."

We find the currency's reaction a little strange; the market always knew the government was going to lose the vote originally set for Tuesday which would in turn open the door to further uncertainty.

If anything, news the vote is being pulled actually moves the whole process forward somewhat.

Regardless, all eyes now turn to 15:30 when May is to address the House of Commons.

"If she is pulling the vote to go back to Brussels it could suggest a renegotiation of the backstop, or at least clarification. We must note that the EU has categorically said this is the only deal and it seems unlikely it would revisit," says Wilson, adding:

"Alternatively, this opens up the prospect of May herself going for a second referendum, with voters asked whether they accept this deal or no deal. A complete shambles is about the only way to describe this situation and investors are right to be very cautious about UK assets."

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ECJ Brexit Ruling Throws More Fuel on the Fire of Uncertainty

The decline in the Pound comes as investors pare back exposure to Sterling in light of growing uncertainty: the cancellation of the 'meaningful vote' on the Brexit deal sets in motion a series of political events unseen in scope since the EU referendum of 2016.

To be clear: there is no certainty as to what will happen when Prime Minister Theresa May's Brexit deal and there are a number of potential scenarios likely to play out.

Our suspicion is that cancelling the vote simply buys the Prime Minister more time as it appears the Conservative party was preparing her ouster in the event of the Brexit deal suffering a large defeat.

On the eve of the now canned vote, the European Court of Justice handed remain-leaning MPs a boost with their ruling that the UK can unilaterally withdraw Article 50 and stop Brexit.

Furthermore, the court ruled:

"Such a revocation, decided in accordance with its own national constitutional requirements, would have the effect that the United Kingdom remains in the EU under terms that are unchanged."

In short, the UK can remain a member with all the previous UK-specific benefits in place. There was speculation that were the UK to abandon its Brexit bid that the European Union would make strong demands that the country aligns fully with other European nations.

The ECJ has just said there is no basis for such suggestions.

The outcome was actually well signposted with the European Advocate General last week advising the ECJ that the UK could unilaterally withdraw.

"The ECJ decision could embolden Remain MP’s and Peoples Vote campaigners to push for a second referendum if the Withdrawal Agreement fails to pass the UK House of Commons on 11 December.  So far, opinion polls remain tight suggesting political uncertainty will continue to undermine GBP whether there is a new UK general election or another referendum," says Joseph Capurso, an analyst with Commonwealth Bank of Australia.

The ruling has had marginal impact on the Pound today, but nevertheless bears a potentially significant on what comes next as remain-leaning politicians will now be able to weaponise the ruling to their advantage, ensuring yet further uncertainty as to how the coming days will play out.

"The UK now appears to have the option of revoking Brexit unilaterally and taking a period of time of its own choosing to decide what happens next," says Malcolm Barr, an economist at JP Morgan. 

Theresa May’s recent parliamentary defeats - first on access to legal advice and then on the Grieve amendment, which would give MPs more of a say were she to fail to win approval for her withdrawal bill - have radically increased the chances the whole Brexit endeavour could be thwarted.

The probability of the UK remaining in the EU has now doubled to 40%, the highest it has been since the referendum, say analysts at investment bank JP Morgan, offering a fundamental view that supports the formation of a technical floor we see forming under the Pound.

The probability of other outcomes has also been revised by Barr, who has reduced the chances of a ‘no-deal’ Brexit to only 10% (down from 20%) and an orderly Brexit to 50% (down from 60%).

The analysis has profound implications for Sterling traders since it reduces the chances of the main scenario likely to cause further weakness - ergo that of a disorderly Brexit - to only 1 in 10. This suggests a very strong probability the Pound is now underpinned by a ‘hard floor’ at current levels, all other things being equal.

While the ECJ ruling is on paper positive for Sterling we have to stress there is simply too much near-term uncertainty to call direction in the currency and we can only tell readers to stay alert of heightened volatility.

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Bank-beating GBP/EUR exchange rates. Get up to 5% more foreign exchange by using a specialist provider to get closer to the real market rate and avoid the gaping spreads charged by your bank when providing currency. Learn more here