Pound Eyes Fresh 2018 Lows vs. the Euro as Markets Brace for a 'No Idea' Brexit & a Possible Leadership Challenge to P.M. May

Above: Prime Minister Theresa May is fighting fires on all fronts; an environment that should keep the Pound subdued. Image © Number 10 Downing Street

- Government faces imminent defeat on customs union vote

- Outlook for Pound "looking negative" as markets brace for 'no idea' Brexit - ING

- "Whichever way one looks at it May remains in a tricky situation" - Commerzbank

The Pound-to-Euro exchange rate is looking set to press fresh 2018 lows amidst growing domestic political turmoil which could be elevated by a defeat of the government in Parliament in coming hours.

MPs are expected to vote on calls by pro-European Conservative party members for the UK to stay in a customs union if there is no trade agreement by January 21, 2019.

The motion is being backed by Labour, making the risk of defeat for the government more likely while encouraging those elements of the Conservative party desperate for a 'clean' Brexit to finally mount a vote of no confidence in their leader.

"Looking messy for GBP now. GBP/USD down to 1.3150 & EUR/GBP could test 0.89. This is markets bracing themselves for a 'no idea' Brexit & a possible leadership challenge to May. Government defeat tonight will be a reality check of crisis. Near-term outlook for GBP looking negative," says Viraj Patel, a foreign exchange analyst with ING Bank N.V. in London.

EUR/GBP at 0.89 gives a GBP/EUR exchange rate at 1.1235; the 2018 low is at 1.1201. But for those with payment requirements the decline in Sterling has already taken the rates on offer to them below this level. At the time of writing the spot market exchange rate is at 1.1270, banks are offering as low as 1.0876 for international payments while the best market rates from companies such as Horizon Curency are seen higher at 1.1150.

GBP/EUR has been stuck around 1.13 for weeks now with analysts saying the exchange rate is the 'cleanest' proxy for financial market sentiment around Brexit, and with tensions within the ruling Conservative party running high it is understandable that sentiment has deteriorated and with it the value of Sterling againt the Euro.

There is good reason to expect the passage of the Trade Bill through parliament to fail as the government appears to have alienated its pro-EU contingent of lawmakers in parliament by yielding to the 'hard' Brexit faction of the Conservative party on Monday, July 16. 

The faction - centred around the European Research Group led by Jacob Rees-Mogg - successfully forced the government to accept four amendments to the customs bill thereby imposing major changes on Theresa May's Chequers plan agreed earlier in the month.

We said yesterday that were Rees-Mogg to have been unsuccessful, the Pound would have had the chance to recover; he has however been successful and Sterling has therefore felt the pressure of the outcome.

Recall, the Chequers plan was initially positive for Sterling in that it signalled a softening of the UK's Brexit stance, but it then triggered a slew of high-profile government resignations which scuppered the Pound's chances of recovery confirming the stability of Theresa May's tenure is as important for moves in the currency as the Brexit plan itself.

The yielding by May to this faction of the Conservative party has predictably triggered a furious backlash by the pro-EU faction of the party who promptly rebelled against the government and voted with the opposition to try and defeat the passage of the customs bill.

The bill passed by a majority of three.

"That is what happens if you try to please everyone. The British Prime Minister Theresa May is facing increasing resistance from within her own party having abandoned her plans for a hard Brexit," says Thu Lan Nguyen, an analyst at Commerzbank. "Whichever way one looks at it May remains in a tricky situation."

Reports suggest that if the opposition Labour Party and Liberal Democrat party are more organised in supporting ammendments to the Trade bill the government will be defeated.

Pro-EU Conservative rebels have proposed an amendment to set staying in the customs union as a “negotiating objective”.

Sterling will also be wary of the potential for a leadership challenge on Theresa May that any parliamentary defeat presents.

"The main risk for the GBP exchange rates short term still is the possibility of a change in government which might threaten the successful conclusion of the negotiations with the EU before the end of the deadline in late March 2019," Lan Nguyen adds.

Members of Parliament are also to vote on whether to start their summer recess this Thursday, instead of next week.

The government has tabled a motion to bring forward the summer break to begin five days earlier than planned and MPs will vote on the motion on Tuesday.

The thinking appears to be that by terminating parliament early the ability to trigger a leadership contest will be scuppered.

Needless to say, there is a healthy dose of opposition to the idea.

"PM May continues to face the risk of leadership challenge as well. There is reportedly a belief in Conservative circles that a no-confidence vote will have to be called by Wednesday this week as there will otherwise not be time to hold it before parliament breaks up for the summer on the 24th July," says Lee Hardman, currency analyst at MUFG.

"Overall, the heightened political uncertainty helps to explain why the Pound has not strengthened yet on the back of the government’s plans for a softer Brexit and the improving cyclical momentum in the UK," adds Hardman.

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Hardening Brexit

Monday's amendments to the customs bill, tabled by the eurosceptic European Research Group, seek to prevent the PM from pursuing a cabinet-backed proposal that abandons almost all of her so called "red lines" in the negotiations. May's proposal effectively means continued single market and customs union membership for the trade of all UK goods.

It also contains a proposal for a UK-EU "mobility of labour" agreement that was criticised as code for the continued free movement of labour. The policy, put forward during a Friday meeting at the PM's countryside residence, Chequers, prompted a wave of resignations including those of Foreign Minister Boris Johnson and Brexit Secretary David Davis.

Another ammendement would make it illegal for Northern Ireland to break away from the UK single market which is a key demand by Brussels who see the forming of a border within the UK as the price to pay to maintain a borderless Northern Ireland.

Recall, Northern Ireland is one of the main sticking points for Brexit negotiations and this ammendment injects fresh uncertainty into the equation.

"Recent declines in the pound come amid a continued fear that we are heading towards an increasingly likely hard exit from the EU, with Theresa May’s inability to face down the Brexiteers making the task of finding a middle ground with the EU harder," says Joshua Mahony, Market Analyst at IG.

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