The British Pound: Fear to Eat Away at GBP's Resolve this Week says Rabobank 

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- GBP tops G10 but Rabobank says Cooper-Boles failure would hurt the £. 

- Market priced for "soft Brexit", rejection to prompt pricing-in of no deal.

- Ireland's Varadkar sanguine, eyes Brexit delay if May's deal rejected.  

The Pound was the G10 universe's best performing currency last week but it could face fresh losses during the days ahead if MPs are not succesful in convincing the market they have neutralised the growing risk of a no deal Brexit, according the analysts at Rabobank. 

Sterling rose strongly last week after a number of politicians defected from the UK's two largest parties and joined a new grouping that's main purpose is to overturn the 2016 vote for Brexit by winning another referendum. 

Britain's currency was further buoyed by reports that several prominent cabinet ministers have told Prime Minister Theresa May they will back the so-called Cooper-Boles amendment to a nonbinding motion that seeks to discover the will of parliament as it relates to the Brexit process. 

"Prime Minister would either have to sack them or allow a free vote," says Rabobank's Jane Foley, in a note to clients. "The choices May faces are stark. Hardline Brexiteers have reported warned her that if she requests an extension to Article 50, they will seek to “end the government”.

The government's current policy is to leave the EU whatever the weather on March 29 and cabinet ministers are obliged to support this objective in the absence of a "free vote" on the Cooper-Boles amendment.

Some rebel MPs, including a number of last week's defectors, appear to have been planning for some time now to oppose whatever deal is agreed between the UK and EU in the hope of frustrating the nation's departure from the bloc 

Above: Pound-to-Euro rate shown at daily intervals.

The Cooper-Boles amendment seeks to force PM May to go cap in hand to EU leaders in Brussels and to ask for an extension to the Article 50 period that is currently scheduled to end on March 29.

This Wednesday's motion would take effect if the EU withdrawal bill, which many MPs say they will vote against, is not ratified before March 13. Any extension would require unanimouos approval from EU leaders.

It's not certain how long such an extension would last for or what kind of conditions would be attached to one from Brussels. Some news outlets have said a delay would be for just three months while others say year-end.

The one thing that is certain is Pound-to-Euro rate price action will be all about the Cooper-Boles amendment and its implications for the Brexit process this week, both before and after voting takes place late on Wednesday.  

"Ahead of the 2016 referendum, the market was wrongly positioned for a ‘Remain’ outcome. Since Brexit talks began the market consensus has consistently pointed towards a soft Brexit. This suggests that GBP would plunge again if a hard Brexit were to occur. As is stands the country is on course for a hard Brexit and legislation would be needed to change that path," says Foley. 

Above: Pound-to-Euro rate shown at weekly intervals.

The current legal position is that if the Withdrawal Agreement or some other alternative are not ratified before March 29, then the UK leaves the EU without any deal at all. Most economists say this would be bad for economic growth in the UK, although predictions vary greatly in the extent of harm they envisage. 

Foley says that fears over the seemingly rising probability of a no deal Brexit, which would see the UK default to doing business with the EU on World Trade Organization (WTO) terms, will start to eat away at Sterling's newfound resolve if the Cooper-Boles amendment does not pass this Wednesday. 

The Republic of Ireland's Leo Varadkar told a press conference Monday he is sure by March 29 there will be either a deal governing the terms of the UK's departure or there will be an extension of the Article 50 negotiating period.

"Whether or not the Copper amendment succeeds [this] week will be largely down to the number of Tory MPs that choose to rebel," says Foley. "If the Cooper amendment passes, the market will assume a hard Brexit is off the table and GBP is set to rally. That said, the size of any rally is likely to be limited by the fact that the market consensus is already well positioned for a soft Brexit and by fear that the UK economy is already slowing."

Rabobank's official forecast is for the Pound-to-Euro rate to be somewhere between 1.1627 and 1.1727 in three months time, but Foley says that if a no deal Brexit takes place in the interim the endpoint for Sterling at the end of May could be radically different. 

"While our central projection is for EUR/GBP to be positioned in the 0.86-85 area on a 3 to 6 month view, on a hard Brexit will see the potential for a move towards EUR/GBP1.00," Foely warns.

Above: Pound-to-Euro rate shown at monthly intervals.

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