Pound Sterling "Could Fall more Sharply" vs. Euro and Dollar says Analyst Eyeing an Uncertain Political Landscape

Image © Pound Sterling Live

- Sterling better bid Tuesday

- May staves off parliamentary rebellion

- Conditions for sustained recovery in Sterling not there say MUFG

- Pound-to-Euro exchange rate @ 1.1330 today, Pound-to-Dollar rate @ 1.2995

Pound Sterling is trading with a more assured tone Tuesday with markets apparently not yet panicking that a Brexit deal and Prime Minister Theresa May's premiership are lost causes.

While they might not panicking they are certainly not bullish either, with that optimism seen earlier in the month continuing to be faded by currency traders wary of the swinging fortunes of the Prime Minister.  

A bout of anxiety concerning the state of both negotiations and May's hold on power saw Sterling slip to two-week lows against the Euro and Dollar at the start of the week.

However, Sterling formed a base late-Monday after May addressed parliament on the state of Brexit negotiations knowing she had to deliver a strong message to stave off a vote of no confidence in her leadership from members of her own parliamentary party who are unhappy with the state of Brexit negotiations.

May told parliament she would not accept an outcome in which the U.K. would remain "indefinitely" in either an extended transition or backstop. This would be the key fear for Brexit purists who are opposed to the backstop plan currently being proposed.

"We would not accept a position in which the UK, having negotiated in good faith an agreement which prevents a hard border in Northern Ireland, nonetheless finds itself locked into an alternative, inferior arrangement against our will," said May.

A prominent opponent of May's negotiating stance, MP Steve Baker, acknowledged "strong reassurances" from May on the question of the border "backstop".

Baker had been planning to launch a rebellion against the government by proposing an amendment to the Northern Ireland bill which was to go before parliament tomorrow but has dropped his stance on May's reassurances. The amendment sought to ensure any attempt by a Brexit backstop agreement to cleave Northern Ireland away from Great Britain must first be agreed by the devolved Stormont assembly.

Had the government lost, May would be seriously weakened and the prospect of a 'no deal' Brexit increased.

May is a Concern for Sterling Bulls

While Sterling has recovered against most currencies, analyst Lee Hardman with MUFG in London is not convinced the conditions are in place to sustain a stronger move in Sterling saying the future of the Prime Minister is a niggle that has returned to the fore for markets.

Press reports suggest Prime Minister May is close to the threshold of the 48 letters required to trigger a vote of no-confidence in her leadership of the Conservative party.

"We think this noise is likely to keep the Pound on the back foot this week," says Viraj Patel, a foreign exchange analyst with ING Bank N.V. in London.

The letters come as displeasure by some party members to the government's stance on Brexit negotiations grows. Only four more letters are required to trigger the vote of no confidence.

"While a leadership challenge may no longer be imminent, it remains at an elevated risk, which is placing the Pound under downward pressure in the near-term. The Brexit mood music remains negative for the Pound, which could fall more sharply if a leadership challenge materialises in the coming months," says Hardman in a briefing to clients.

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Good Buying Opportunity

We see no material set-pieces on Brexit that might bother markets and we therefore expect conditions to potentially settle over the remainder of the week provided no more letters flow through which could allow GBP/EUR to rally as per our week ahead forecast.

ING's Patel notes that we have heard no-confidence threats plenty of times before and the fact that Tory rebels only have one shot at ousting the PM over the next twelve months means that we could still be some way away from an actual leadership contest (not least as Brexiteers do not currently have a viable replacement lined up).

"If this is indeed another false start in terms of UK political risks, then we see GBP/USD below 1.30 as a good tactical buying opportunity – and reiterate a buy on dips strategy at these levels," says Patel. 

ING see limited risks of EUR/GBP moving back to 0.90 with Italian budget noise offsetting Brexit woes. 0.90 in EUR/GBP gives a GBP/EUR exchange rate of 1.11.

To see where the likes of Goldman Sachs, HSBC, Lloyds, Barclays and Citi are forecasting both GBP/USD and GBP/EUR over 3, 6 and 12 month timeframes please see download the respective consensus forecast reports from Horizon Currency Ltd. (GBP/USD here, and GBP/EUR here.)

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Bank-beating GBP exchange rates: Get up to 5% more foreign exchange for international payments by using a specialist provider to get closer to the real market rate and avoid the gaping spreads charged by your bank when providing currency. Learn more here