Pound-Euro Tests Key Level, Beware a Rebound as Path to 2nd EU Referendum has Just Become Clearer on Labour Brexit Shift

File image of Labour leader Jeremy Corbyn. © Andy Miah, accessed Flickr, reproduced under CC licensing conditions

- Road to 2nd EU referendum more obvious on Labour Brexit shift

- Sterling-Euro needs to close above key 1.1122 area to stave off further losses

- Wait-and-see approach towards Sterling could be prudent

Pound Sterling is seen under fresh assault by sellers on Tuesday, July 09 as a multi-week sell-off shows little sign of dying.

We do however question the selling pressure, based on the latest developments on Brexit, and would expect to see the rate of decline of Sterling fade, particularly against the Euro.

At the time of writing a fierce battle over a key level of support in the GBP/EUR exchange rate is under way in global currency markets: should the exchange rate close the day below 1.1122, the July low, then a technical deterioration that advocates for further losses will have occured.

For a rangebound, consolidative, pattern to occur over coming days and weeks the exchange rate must defend this 'line in the sand' and end the day above 1.1122 we feel:

Above: The rate of decline in Sterling has levelled off, leading to suggestions a period of consolidation is possible.

This is yet possible as we feel market participants will eventually weigh up the multitude of risks facing the Pound - namely an impending 'no deal' Brexit - against the potential for a substantial recovery should a Brexit deal be achieved by the incoming Prime Minister. 

Another potential positive is that a General Election yields a remain-favouring government with one caveat: that the perceived anti-business Labour Party of Jeremy Corbyn does not control a majority.

"With parliament opposing a hard Brexit, clashes in parliament will increase political uncertainty and weigh down GBP sentiment in the short-term," says David A. Meier, a currency analyst with Julius Baer in Zurich. "Long-term, a soft Brexit or a process leading to its termination, remain likelier than a 'no deal' Brexit."

We believe the path to a second EU referendum and an ultimate termination of Brexit has risen on news the Labour leader has announced today that he had "closed Labour’s Brexit consultation" and a “settled position" has agreed at a meeting of the Shadow Cabinet.

In a letter to party members, Corbyn said that he would demand that Boris Johnson or Jeremy Hunt put their Brexit proposals to the country in a referendum, and that if they do, Labour will campaign to reverse the 2016 referendum result and stay in the EU.

The developments come after a meeting of Labour Party-affiliated trade unions resolved on Monday to back a second EU referendum in the event that a Labour Party was unable to renegotiate Brexit.

The decision by the Unions and leadership now aligns it with its membership which is vastly in favour of staying in Europe.

However, Corbyn faces a risk that the decision alienates the Party from its Brexit voting heartlands in the North.

"If Tory PM puts their deal or no deal to a referendum, I want to make it clear that Labour would campaign for Remain against either no deal or a Tory deal that does not protect the economy and jobs," said Jeremy Corbyn on Tuesday.

Market expectations for a snap General Election in 2019 have meanwhile risen since the start of the year, raising the prospect of a Labour Party-led coalition taking the helm.

By the looks of the latest polling that puts Labour in fourth position, it appears safe to suggest that Labour cannot secure an outright majority, but they could still well emerge as the largest party owing to the country's first-past-the post system.

This outcome is made all the more likely in the event that the Brexit Party - polling at around 23% nationally - enters the fray and severely diminishes the Conservative Party: yes, the Brexit Party will certainly eat into Labour's Brexit-voting heartlands but the Labour majority tends to be so absolute here that Nigel Farage's fledgling party will struggle to replicate the success they can achieve in Conservative constituencies.

The Liberal Democrats are meanwhile enjoying a strong surge in polling - recording a 20% vote share in the latest YouGov poll - and it appears that a confidence-and-supply arrangement between Labour and the Liberal Democrats is highly possible.

The Liberal Democrats are adept at converting vote share into seats under the current system, which adds confidence to expections that a Labour/Lib Dem combination will beat a Brexit Party/Conservative bloc.

We believe that the Liberal Democrats would certainly not enter another coalition government but would exact a second referendum as the price for supporting a Labour minority government on various pieces of key legislation. Judging by Labour's position on the matter, this would readily be granted.

The road to a second EU vote, and potentially a remain outcome, has therefore become clearer we believe.

But, with Brexit being the default outcome on October 31, and the prospect of a General Election posing significant downside, it is little wonder the Pound-to-Euro exchange rate is looking paralysed around current levels with a downside bias.

We do however ultimately expect markets will maintain a wait-and-see approach to Sterling that could well see sideways action evolve over coming weeks.

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