Update: Pound Powers Higher on Bumper Wage Data while MPs Lay Ground Work for Suspending Brexit

Above: Nick Boles. Image © Policy Exchange, sourced under CC Licensing conditions

- Bumper Wage Data Supports Sterling

- Pound maintains strong start to 2019

- Boles, Cooper, Grieve offer Parliament power to stop 'no deal'

Pound Sterling trades towards the top end of a multi-week range against the Dollar and Euro thanks to a combination of positive economic data and developments that suggest a 'no deal' Brexit will be avoided on March 29.

The Pound-to-Euro exchange rate is quoted at 1.1393 and the Pound-to-Dollar exchange rate is quoted at 1.2917 while Sterling is seen trading higher against the majority of the world's ten largest currencies.

Declining 'no deal' Brexit risks rose overnight after the foundations for an audacious attempt at preventing a 'no deal' Brexit from taking place were laid in the House of Commons when a number of amendments to Prime Minister Theresa May's Brexit Deal 'version 2' were tabled.

An amendment from MPs Yvette Cooper and Nick Boles seeks to Extend Article 50 in order to effectively block a 'no-deal' Brexit. Cooper chairs the home affairs select committee will use their amendment to secure enough powers for MPs to extend Article 50 in the event of no deal being ratified by Parliament by the end of February.

Cpmservative MP Dominic Grieve has also tabled an amendment that if accepted by the Speaker of the House, will be able to go further than the Cooper and Boles amendment and could pave the path to block a 'no deal' and potentially suspend Article 50 altogether.

This is potentially the more controversial move as it overturns normal constitutional conventions that typically allow the government to control the timetable in Parliament.

If a motion is put forward which is supported by 300 of the 650 MPs (46%), including ten Conservative MPs and at least one MP from five parties, then that motion would jump to the top of the proceedings of the next day of business in the Commons.

This could see the motion push ahead of any parliamentary business the government has planned - even if the other 54% did not support it.

The Labour Party has also tabled amendments aimed at preventing a 'no deal' Brexit, but reports confirm Conservative remain-leaning MPs won't be backing Labour's proposals, effectively killing them at birth.

From a currency markets perspective, it now becomes clear that the House of Commons does in fact have the means to provide insurance against a 'no deal' Brexit, the outcome therefore is one that is positive for the currency and provides some notable protection to the downside. However, we must also be wary that there is no conclusive evidence that these motions can in fact stop a 'no deal' Brexit, indeed, there is no guarantee the EU 27 would agree to extend the Article 50 period. As such, near-term the currency might be choppy.

"GBP has taken some comfort from news that a Brexit delay bill would likely be approved by lawmakers. This has been proposed by a cross party group of MPs and would extend Article 50 if a deal was not in place by the end of February. While this would remove the prospect of a hard Brexit, plenty of political uncertainty remains in the UK and this suggests that the coming week or so could be another rocky ride for market sentiment," says Jane Foley, Senior FX Strategist with Rabobank.

The moves are also problematic in that we are concerned MPs have just undermined the Prime Minister's negotiating leverage with the European Union which could lead to a prolonged period of Brexit paralysis.

The Prime Minister yesterday announced she would consult further with various interest groups on what changes to her Brexit deal could gain the confidence of the House of Commons before heading back to Europe to request further concessions.

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In an address to parliament it became clear that May's focus would likely turn to the Irish backstop which, in its current form, prevents Northern Ireland's DUP and a swathe of Conservative party rebels from backing the deal.

But, May has her work cut out: she needs to secure some legal guarantee that any use of the backstop is strictly time limited, something the Europeans have been steadfast in rejecting.

That said, Poland's foreign minister Jacek Czaputowicz yesterday suggested the backstop be limited to five years in order to break the impasse, something domestic political commentators suggest would almost certainly be enough to allow MPs to back May's deal.

The worry is that the EU will not be forthcoming with the concessions required to pass the Brexit deal in light of moves by MPs to effectively tie the hands of their Prime Minister: the threat of a 'no deal' Brexit is ultimately a strong position for the UK to negotiate from.

The danger is Parliament manages to extend Article 50 for the remainder of the year, throwing the UK into a prolonged state of paralysis and uncertainty; hardly the conditions that would help the Pound. For the British Pound to really pick up some steam over coming months we would want to see May's Brexit deal be ratified by parliament as only this outcome provides a clear multi-year framework for the UK economy to operate within.

"As long as Brexit uncertainty is not resolved, we expect EURGBP to stay in a range around 0.90," says Daniel Trum, a strategist with UBS. EUR/GBP at 0.90 gives a GBP/EUR exchange rate of 1.11.

If a Brexit transition deal is passed, Trum says EUR/GBP should drop to 0.86 on the back of the Bank of England resuming rate hikes in 2019, this gives a GBP/EUR exchange rate of 1.1628.

Foreign exchange strategists with UniCredit say they are expecting May's Brexit deal to succeed in parliament on a second or third attempt, and this should spark a strong rally in Sterling against the Euro.

"Our base case remains that either the deal on the table or a slightly amended version of it will eventually pass in the Commons, at the second or third time of asking. We would expect sterling to rally across the board once it becomes clear that a deal will be found," says Katherin Goretzki, a foreign exchange strategist with UniCredit Bank.

Goretzki says should the deal pass the Pound-to-Euro exchange rate could rally and break through 1.1765.

Bumper Wage Data Supports Sterling

The Pound received a boost Tuesday morning after the ONS reported a strong set of labour market data that appear to fly in the face of the general gloomy consensus on the economy in light of ongoing Brexit uncertainty.

The headline was a 3.4% rise in wages, where markets had been expecting a reading of 3.3%.

The unemployment rate meanwhile unexpectedly fell to 4.0%, from 4.1% previously.

Make no mistake, the jobs market is in rude health and wages are gaining traction, creating conditions ripe for further interest rate rises at the Bank of England.

The general rule-of-thumb is that higher interest rates tend to be a positive for a currency.

However, the Bank of England have said they will hold off on raising interest rates until clarity on Brexit is provided. Therefore, our assumption for material upside in Sterling should Theresa May's Brexit deal be approved by parliament is only strengthened by the current jobs data.

"The UK average earnings and unemployment figures have been somewhat overshadowed by continued Brexit chaos. The reading, which measures the growth in 'basic pay,' has provided some support for the Pound, however investors are still focused on how Theresa May will negotiate with the EU over the next few days," says Tyler Griffin, currency specialist at OFX. "Looking ahead, if several ministers resign in response to being banned from a vote to stop a no deal Brexit, as Amber Rudd has suggested, we expect further pressure on the pound. However, there is growing market confidence that a ‘no deal’ scenario will be avoided, which should ensure some buoyancy for the Pound.”