Expect Key EU Concession to Come After Brexit Deal Defeat Next Week

Above: Prime Minister May's battle to secure backing for her Brexit deal ultimately rest with winning over the DUP via securing fresh concessions from the EU. Image Image © Pound Sterling Live.

- GBP positive at start of new week

- Parliament to vote on Brexit deak January 15

- Any sign of DUP support for deal remains key trigger to any GBP rally

- Nomura say buy the Pound against the Euro

The British Pound is seen holding towards the top of its recent ranges against both the Euro and U.S. Dollar at the start of a week tipped to be heavy in political intrigue.

The Pound-to-Euro exchange rate is quoted at 1.1160 on the interbank markets, having been as low as 1.0988 in the prior week, while the Pound-to-Dollar exchange rate was quoted at 1.2750, having been as low as 1.2442 the week prior.

Today sees UK parliamentarians return to Westminster and political developments will remain the central driver for Sterling exchange rates ahead of the key vote on the EU-UK Brexit deal, scheduled for January 15.

The debate on the Brexit deal should commence mid-week.

"Multiple possible Brexit outcomes have come to light during the recent UK parliament recess. We still expect the vote to go ahead on 15th but Brexit day to be delayed. Multiple possible scenarios & a Brexit push back should all maintain heightened uncertainty keeping GBP/USD & Euro crosses on a general downtrend," says Neil Jones, a currency dealer with multinational bank Mizuho in London.

We know the UK parliament is set to vote down the Brexit deal in its current format with a cabal of 10 DUP and 60-70 Conservative party MPs showing a particular opposition to the deal's legal commitments on the Irish border backstop.

"For now, the prospect of getting the bill through seems no better than when the last scheduled vote was postponed in December. Critically, the DUP still say they won’t support the bill," says Adam Cole, a foreign exchange strategist with RBC Capital Markets.

But, there are a number of key issues to watch that could trigger notable moves in Sterling over the next couple of weeks, we believe the two following points in particular must be considered:

1) Any Big EU Concession on the Irish Border not Coming Before the First Vote

We believe Northern Ireland's DUP party is central to the outlook for both the Brexit deal and Sterling as they hold the balance of power in parliament; should May win over DUP support we believe the vast majority of Conservative Brexiteer opponents will fall into line and vote for the deal.

The DUP are steadfast in their opposition to the Brexit deal over the matter of the Northern Irish border backstop; should this Northern Irish party feel enough assurances have been provided over the matter a major argument against the Brexit deal being used by Conservative party opponents is snuffed out, if May gets the DUP on side she dramatically slashes opposition in her own party.

Passing the deal would provide a huge injection of certainty into the UK economy and we expect the British Pound will rise sharply in a relief-style rally.

However, for the DUP to fall in line there will need to be legal assurances provided by the European Union that the backstop will not be allowed to last indefinitely in the event of no future trade deal being agreed that keeps the Northern Irish border open.

The EU know this issue alone decides the fate of the deal, and we would expect some concession to be forthcoming. We suspect however that it will only come after May loses a first vote and heads back to Brussels asking for concessions, news from the EU commission on Monday is that there are no Brexit talks scheduled this week as negotiations are closed.

It would only be in the second vote that May's hands are boosted by the Europeans. We know that German officials will be meeting Irish counterparts in Dublin on Tuesday to see what more can be done to assist May in getting the deal over the line, so there will almost certainly be some form of help coming May's way.  The EU will want to see the scale of the opposition to the deal before calibrating the scale of any concessions they offer hence we don't expect it before the first vote.

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2) 'Remainers' Move towards a Government Shut Down to Stop 'No Deal'

It has long been said that there are the numbers in parliament to scupper a 'no deal' Brexit taking place, the only problem is that how this will be achieved remains unseen.

We have however this weekend been provided the first concrete clue of what this process might involve.

Reports confirm pro-Remain MPs will seek to amend the Finance Bill in such a manner that the Treasury will be deprived of the powers to change their tax and spend plans in the event of the government pursuing a 'no deal' Brexit.

Pundits say MPs would in effect force a government shutdown in similar fashion to the current government shut down in the United States.

"MPs will vote on Tuesday on two amendments to the Finance Bill that would lead to a gridlock in Whitehall unless Theresa May wins approval from parliament for a deal with Brussels," says Tim Shipman, political editor at the Times.

Shipman adds, "two members of Theresa May’s team last night admitted the plan could lead to “total paralysis” at the top of government."

Labour MP Yvette Cooper leads the group seeking to amend the Finance Bill and she says the amendment "would block some of the Treasury’s no-deal powers unless parliament has explicitly voted for no deal or unless the government has requested an extension of article 50. We’ll be looking to table similar safeguards to all government legislation.”

Would the majority of parliamentarians risk clipping the wings of the Treasury in the event of a 'no deal' Brexit? We doubt it as this plan is tantamount to blackmail and considering the seriousness that a 'no deal' presents we see this as an incredibly damaging stance to adopt. Therefore we would not expect these amendments to pass on Tuesday.

If they did pass though, the prospect of a 'no deal' Brexit has just become a great deal more damaging to the UK economy, and by extension, Sterling.

These votes should ultimately give us an indication as to the scale of the remain-leaning opposition to the Brexit deal. If it can be exposed that they do not carry a majority to carry any alternatives to May's Brexit deal we would expect it to only strengthen May's hand by proving hers is the only game in town.

Expect the British Pound to maintain its current trends against both the U.S. Dollar and Euro until clarity on the above is provided:

GBP/USD is likely to move gently higher in line with a softening U.S. Dollar while the GBP/EUR is likely to test the 1.12s according to our technical analyst Joaquin Monfort.

Foreign exchange strategist Jordan Rochester with Nomura in London says he is a buyer of Sterling on any weakness it might suffer against the Euro, saying the UK parliament will ultimately ensure the UK avoids a 'no deal' Brexit.

"Over the next few weeks parliament is likely to attempt to find a majority in favour or against Theresa May’s deal. Rather than increasing the likelihood of a no deal outcome, we expect either the deal to scrape through, owing to last minute concessions to the key Brexit groups, or if parliament forces the government to adopt a different or more market positive Brexit stance," says Rochester.

Sterling's ability to recover from dips below 1.10 are an encouraging signal argues Rochester.

"Hope is a powerful thing and the risks are now skewed to the upside," adds the strategist.

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Bank-beating exchange rates. Get up to 3-5% more foreign exchange 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