Spain to Vote Against Brexit Deal: Pound Sterling Looking too Expensive vs. Euro and Dollar in Face of Mounting Barriers

Above: The Gibraltar flag. Image © Adobe Images

- Spain to vote against Brexit deal over Gibraltar

- E.U. closes door to further concessions to U.K.

- Yet Sterling trades at levels consistent with a deal still being reached

- We believe markets too optimistic

The British Pound might be trading at elevated levels in the face of fresh news that suggests it is unlikely the E.U.-U.K. Brexit deal will come into force, raising the prospect of a 'no deal' Brexit in 2019.

Spain has threatened to reject the Brexit deal if they do not get a last-minute say on the future of Gibraltar; and judging by the European Commission's response, their demand won't be met.

The last-minute Spanish intervention highlights to us a growing barrage of resistance to the Brexit deal which we believe might not be overcome and which leaves the British Pound at risk of a sharper adjustment lower.

Considering that the Brexit deal is pretty much sealed, we struggle to see how the E.U. would allow Spain to get amendments when Theresa May, who desperately needs a heap of concessions from the E.U., has been blocked.

Spain's Prime Minister Pedro Sanchez has said Spain will vote against the Brexit deal if the text is not amended.

"As of today, if there are no changes with respect to Gibraltar, Spain will vote no to the agreement on Brexit," Sanchez said during an Economist conference in Madrid.

Madrid wants to secure a special veto on any future E.U. trade agreement with Britain that it believes does not satisfy their demands on Gibraltar.

Clearly the Spanish are looking to leverage E.U. unity to secure more control over the British territory in much the same way Ireland leveraged Northern Ireland to shoehorn the U.K. into as close a trading partnership as possible.

Spain has clearly laid down a red line and puts paid to the notion of a unified E.U. negotiating position highlighting the Brexit deal faces opposition on both sides of the English Channel.

The problem for Spain, and the Brexit deal, are reports the E.U. have closed the book on negotiating the Withdrawal Agreement to shut out the prospect of offering further concessions to Theresa May.

"Any hope the PM had of last minute lobbying on the E.U.-U.K. post Brexit relationship document in her visit to Brussels this week is out the proverbial window. EU officials suggesting the text will be signed off EU internally before she meets JC Juncker," says katya Adler, BBC Europe Editor.

Therefore, assuming the U.K. and E.U. would have to negotiate any agreement that satisfy Spanish demands we find it very hard to believe the U.K. will show any goodwill in the face of E.U. intransigence.

Spain cannot block the agreement in itself as it requires a strong qualified majority, i.e. 72% of the 27 member states (i.e. 20 member states) representing 65% of the EU27 population.

"Spain accounts for slightly more than 10% of the EU27 (and represents only one member state). Therefore, it cannot block the deal alone, as it would mean 96.3% of the EU member states, representing nearly 90% of the EU27 population vote in favour of the deal." says Piet P.H. Christiansen, Senior Analyst with Dankse Bank.

The Pound is Looking too Optimistic at these Levels

We argued in a piece earler this week that Pound Sterling was trading at levels consistent with a belief that the Brexit deal will still pass through parliament as our view was that May would eke out further concessions over coming days.

It is now clear this is unlikely, therefore our earlier confidence in the deal being delivered looks misplaced.

"The PM will also not be able to lobby EU leaders at the Brexit seal the deal summit this Sunday according to the planned choreography of the meeting. The EU 27 will meet alone first to sign off the text amongst themselves before they sit down with May," reports the BBC's Adler.

As such we believe the Pound is trading at optimistic levels and will surely move lower as markets increasingly price in the likelihood of no deal being agreed.

The Pound-to-Euro exchange rate is quoted at 1.1235 - close to the middle of the long-term sideways trend. If markets were of the belief a 'no deal' Brexit was likely we would expect the exchange rate to be below 1.11 which is the bottom of the longer-term range.

The Pound-to-Dollar exchange rate is quoted at 1.2838, the post-referendum floor is just below 1.20 and we see a stronger move to this level if the market abandons the view a deal will be reached.

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