May Leaves Brussels Empty Handed, Sterling Likely to Trade Sideways from Here

Image © European Union, 2018 / Source: EC - Audiovisual Service

- May's appeals for help with backstop spurned by EU leaders

- If anything, EU offer less assurances then previously

- Sterling to trade sideways from here, state of limbo to extend

- Pound-to-Euro exchange rate is quoted @ 1.1120, Pound-to-Dollar exchange rate is quoted @ 1.2631

The Pound trades with a soft undertone Friday, nursing a weekly loss of 0.5% against the Euro and 0.75% against the Dollar ahead of the weekend on news there has been no last-minute concession from the European Union to help sell the Brexit deal to a divided parliament.

The declines could be deeper were it not for the recovery that accompanied Prime Minister Theresa May's vote of confidence midweek; but the gains were ultimately capped by expectations that little has changed with regards to the difficulty she faces in getting her Brexit deal through parliament.

Overnight it is confirmed that the European Union has been unwilling to provide her further concessions required to win over opponents of the Irish backstop deal, we wrote yesterday afternoon that the UK was hopeful the EU could provide legal assurances that the backstop would not be indefinite through the use of a codicil.

This is a legal attachment to the Brexit deal that would go some way in placating Brexiteers worried that the Brexit deal would see the UK effectively signing up to a treaty with the power to trap the country in the European Union's legislative web for an indefinite period of time.

The beauty of the codicil is that it would not require the EU to reopen the Withdrawal Agreement, something they have vowed not to do, while offering concrete assurances on the desires for the backstop to be temporary.

We said that were the EU to move along these lines the prospect of the Brexit deal being agreed by Northern Ireland's DUP would rise significantly, thus a hard 'no deal' Brexit would be avoided.

We expected the British Pound to rally sharply on such a concession.

In the event, the EU have offered nothing to May, and our forecast that such an outcome would keep Pound locked in its current state of purgatory will therefore likely come to pass.

Arriving for the European Council summit May had said, "I don't expect an immediate breakthrough but what I do hope is that we can start work as quickly as possible on the assurances that are necessary."

May made a personal address to EU27 leaders and took questions from them in an afternoon meeting.

Leaders then met without her and a list of five "conclusions" was published.

Notably, a draft lines that has been replaced was: "The union stands ready to examine whether any further assurance can be provided."

It was replaced by a call to "work on preparedness at all levels for the consequences of the UK's withdrawal to be intensified, taking into account all possible outcomes"

So the EU appears to have actually hardened its insistence that it is done negotiating and is instead to step up preparations for a 'no deal' Brexit.

European Commission President Jean-Claude Juncker said: "we don't want the UK to think there can be any form of renegotiation, that is crystal clear. We can add clarifications but no real changes. There will be no legally binding obligations imposed on the withdrawal treaty."

Oh dear - doesn't sound like May's speech to leaders went brilliantly. Juncker says UK has been 'nebulous & imprecise' in its positions. 'UK friends need to say what they want instead of asking us to say what we want. We'd like within a few weeks UK to set out their expectations'

— Nick Gutteridge (@nick_gutteridge) December 13, 2018

"Strong and unhelpful language from Juncker tonight, giving May little hope of anything she can offer to backbenchers at home," says Laura Kuenssberg, Political Editor at the BBC. "And EU conclusions have weaker claims on backstop than previous drafts."

The outlook remains as uncertain at the end of the week as it did at the start, and therefore we would expect the British Pound to remain under pressure going forward.

We expect Prime Minister Theresa May to return to the UK and continue trying to sell her deal while letting the clock tick down in order to perhaps try and flush out some support from those parliamentarians keen to avoid a no deal.

We also expect a vote of no confidence to be called by the Labour Party, the Government should however survive this vote as the Conservative party and DUP fall back to partisan lines to defend their power.

We, and most analysts, are less sure on what will happen once May loses the parliamentary vote on the Brexit deal: A 'no deal' Brexit, the calling for a second referendum or a dilution of parliament are all possible, the latter two requiring Brexit to be delayed via extension of Article 50.

The Pound-to-Euro exchange rate is quoted at 1.1120, having been as high as 1.1170 on Thursday and as low as 1.10 on Tuesday.

The Pound-to-Dollar exchange rate is quoted at 1.2631, having been as high as 1.2755 on Thursday and as low as 1.2477 on Tuesday.

We can meanwhile report that consensus estimates for GBP/EUR and GBP/USD have been raised for the 3, 6 and 12 month timelines. We recommend downloading the 2019 exchange rate forecast report from Horizon Currency to see where over 50 of the world's leading investment banks and financial institutions are expecting GBP/EUR (link) and GBP/USD (link) to trade through 2019.

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