Pound Sterling Nurses Weekly Losses vs. Euro and Dollar as 'Brextension' Becomes Latest Threat to May's Leadership

Above: European Council President Tusk has told reporters in Brussels that the E.U. would in all likelihood agree to the extension of the transition period if requested by the U.K. Image © European Union.

- Pound Sterling worst performer of past week

- May floats plan to extend Brexit transition period

- Pound-to-Euro exchange rate @ 1.1369, Pound-to-Dollar exchange rate @ 1.3124

Theresa May's latest gambit on Brexit negotiations has opened up a new front of opposition to her leadership from within her Conservative party ensuring what should be a positive development for Pound Sterling has morphed into a headache.

The prospect of fresh political instability in the U.K. comes as Prime Minister May floats the idea of a 'Brextension' - a one year extension to the already sought two year transition period. 

European Council President Donald Tusk has told reporters in Brussels that the E.U. would in all likelihood agree to the extension of the transition period if requested by the U.K.

Currently set at two years, the transition period would see the U.K. remain fully in E.U. customs and single-market structures but without any say in how these structures are run. The U.K. would still have to pay its full contributions, estimated to be around £10BN per year.

Theresa May made an oblique reference to such an idea when addressing E.U. leaders mid-week; it was no formal proposal but clearly it was designed to flush out the feelings of both the E.U. and her own party back home.

Tusk has given a positive response on the E.U.'s behalf, briefing media today Tusk says:

"There has been a lot of speculation about the length of the transition period once the UK leaves the EU. Let me say this, the issue of the length of the transition period was not discussed amongst the EU 27 leaders yesterday.

"Let me recall that in her Florence speech in September 2017 the prime minister proposed a transition period for around two years and the EU accepted this proposal unanimously.

"Therefore if the UK decided the extension of the transition period would be helpful to reach a deal, I am sure the leaders of the EU would be ready to consider this positively."

Business leaders appear to have welcomed the idea, "if extending the transition period makes the Withdrawal Agreement easier to agree it should be welcomed. Securing the transition period remains the top priority for business to protect jobs and investment,” says Carolyn Fairbairn, CBI Director-General.

The CBI say the risk of 'no deal' is already biting hard with firms accelerating their contingency planning, diverting investment and costing jobs.

"And many firms, especially smaller businesses, simply have no time to prepare. All efforts should focus on securing transition to relieve pressure on firms, protecting people, wages and living standards across Europe," adds Fairbairn.

Implications for the Pound: A Positive Idea on Paper but a Nightmare in Reality

For the British Pound the idea of any extension to the transition period is technically a positive one.

"The real driver in the markets this morning is the news that Prime Minister May could be looking at extending the Brexit transition period by a further 12 months. To many this seems like a sensible option, why rush the negotiations whilst so many details remain?" notes Hamish Muress, currency analyst at currency brokers OFX.

But, Pound Sterling is yet to reflect any positivity and is in fact seen trading lower against all its major G10 competitors on a week-on-week comparison:

The extent of the opposition to any 'Brextension' should not be underestimated with initial reactions from May's Conservative party being scathing.

Nick Boles, an MP and former minister, described any attempt to extend the transition period as a "desperate last move", warning that May was losing the confidence of her party.

He told BBC Radio 4’s Today programme on Thursday that the EU was demanding “humiliating concessions”.

Boles, a former remain supporter, adds:

“It’s a classic of negotiations that she keeps on thinking that one more concession is going to somehow [succeed], with one bound and she’s free, and she’s not going to be free, she’s getting ever more trapped.

“I’m afraid she is losing the confidence now of colleagues of all shades of opinion, people who have been supportive of her throughout this process."

If May is ultimately ousted by an increasingly alarmed Conservative party the chances of a 'no deal' Brexit will surge, and the Pound will likely suffer a significant retreat.

The 'Brextension' is therefore more likely to be the scourge of the Pound than its saviour.

"From a GBP perspective Brexit is very much a digital event and EUR/GBP could end the year anywhere between parity and 0.80 depending on the eventual outcome of talks – a hard Brexit or an agreement," says Richard Falkenhäll, Senior FX Strategist at SEB, the Scandinavian lender.

SEB says those watching Sterling should be aware of one certainty, and that is the promise of GBP volatility being elevated in the period until the December 13 EU-summit which is seen to be the realistic deadline for talks to conclude.

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