Corbyn Shift Delivers Best Pound-to-Euro Exchange Rate in Over a Month

Above: Labour leader Jeremy Corbyn, file photo, © Andy Miah, sourced Flickr, reproduced under CC licensing.

Pound Sterling powered to a 4-week best against the Euro on Friday, May 03 following the substantial defeat suffered by the Conservative Party in local elections which triggered expectations the government will hasten efforts to secure a cross-party Brexit deal over coming days.

However, it was Labour Party leader Jeremy Corbyn who was responsible for driving Sterling late in the day with his comments that the local election results should spur lawmakers in the House of Commons to find a way to "get a deal done" to leave the EU.

Corbyn told ITV there was now a "huge impetus" on every lawmaker to deliver a deal.

Markets read this as a sign the Labour Party are ready to slip into a more accommodative mood in cross-party negotiations with the government in order to try and secure a deal.

Prime Minister Theresa May has set next week as a deadline for cross-party talks to reach a deal.

We believe Sterling would benefit greatly on a cross-party deal as this raises the prospect of the Brexit Withdrawal Agreement finally being ratified by the House of Commons, in the process putting an end to months of uncertainty and potentially allowing opening the door to a jump in UK economic activity.

"GBP helped by Corbyn pushing for a deal to be done... positive rhetoric from Corbyn suggests traction behind the scenes in a deal," says Simon Harvey, FX Analyst at Monex Europe.

Corbyn's comments were not what markets were expecting: typically it is the official opposition that benefits from the government's woes in local elections, instead Labour suffered deep losses.

Activists from both parties say the Brexit impasse in the House of Commons is being cited by voters for their decision to withdraw support from both parties.

"We estimate that if the pattern of voting in the local council elections were to be replicated across the whole of Great Britain, both the Conservatives and Labour would have won 28% of the vote. This is only the second time that this calculation has put both those parties below 30%," says Sir John Curtice, Professor of Politics at Strathclyde University.

Corbyn appears to have accepted Brexit is a problem his party needs to put behind it: on one hand the party membership are heavily in favour of remaining in the EU while the core Labour 'heartland' electorate, particularly in the North, tend to heavily favour Brexit.

"The party lost ground more heavily in Leave-voting areas than in Remain-voting ones, a pattern that it shared with the Conservatives (who in previous years have tended to perform better in such areas). This has been seized on by pro-Leave Labour MPs as evidence that the party should reach an agreement with the government which would pave the way for the UK to leave the EU," says Curtice.

Corbyn's deputy John McDonnell had hinted the party was in a more constructive mood on cross-party talks earlier in the day when he said:

“We'll see what final results of local elections look like by end of day as they are pretty mixed geographically up to now but so far message from local elections- "Brexit - sort it." Message received.”

We expect markets to main a constructive tone to Sterling trade over coming days as anticipation builds into an announcement concerning the status of talks.

Recall, we reported on May 01 Labour were relatively positive on progress in talks, a view we felt was partly responsible for this week's outperformance by Sterling. The currency can go higher if expectations for progress are maintained.

However, if the two sides do in fact fail to reach agreement then expect these gains to be given back.

The announcement could come as a relative shock given the steadily building optimism on the status of cross-party talks over the past week and the move lower would be relatively sharp.

Both of the UK's major political parties have realised Brexit is a lose-lose situation for them, and they want to lance the boil. In turn, currency market action should become more exciting.

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