Pound Lower as Markets Eye 24 Hours of Risk Ahead

Above: Sir Graham Brady. Image (C) Pound Sterling Live.

- Risk to Sterling should Cooper's amendment fail

- Brady amendment looks to unite Conservatives behind May's deal

- Pound-to-Euro exchange rate @ 1.1513

- Pound-to-Dollar exchange rate @ 1.3161

Pound Sterling moved lower at the start of the new week as traders turn more cautious ahead of Tuesday's key parliamentary votes that should give further information on the nature of the UK's exit from the European Union. Tuesday sees parliament vote on a government motion detailing the next steps the government intends to take over delivering Brexit, and parliament will also vote on a number of amendments to the government's motion, one of which could delay Brexit by up to nine months.

The amendment seeking a delay will be brought forward by Labour MP Yvette Cooper and is expected by markets to be voted through, and we believe this assumption accounts for much of the Pound's rise over recent weeks. Any delay to Brexit beyond March 29 is expected to ensure a 'no deal' outcome is avoided while opening the door to further 'softer' options.

We believe there is however a significant downside risk to Sterling should the Cooper amendment fail, we believe markets might be underpricing this risk.

"Here's one scenario for tomorrow which is unlikely but I think underpriced. None of the amendments have a majority, Cooper etc fall narrowly. And yet May's motion in neutral terms also does not have a majority," says Henry Zeffman, Political Correspondent at The Times. We think this is a scenario worth bearing in mind as it could have a notable impact on the value of the Pound, sending it tumbling lower as traders quickly ramp up bets on a 'no deal' Brexit once more.

The other major development concerning the Brexit-Sterling interplay is that parliament could this week give the government a directive to go back to Brussels and seek substantial changes on the Northern Ireland backstop that would ultimately allow parliament to then ratify Prime Minister Theresa May's Brexit deal; which for us remains a best-case scenario for those wishing for a higher Pound.

However, we remain wary that numerous EU officials have over recent days maintained a line that the backstop is not open for negotiation, putting the UK and EU on a collision course, which could weigh on the British Pound over coming days.

'Brexiteers' are reportedly coalescing around an amendment that could allow them to ultimately back a modified deal. The amendment proposed by Sir Graham Brady, vows to back the prime minister’s deal with the EU on condition that the Irish backstop plan is replaced by “alternative arrangements”. And it's not just Brexiteers who would support the amendment, this morning Nick Boles - a leading proponent of 'soft Brexit' in the Conservative party has also indicated he would vote for such an emandment.

Opposition to the Brexit deal from within the Conservative party and Northern Ireland's DUP centres on the Irish backstop, which if triggered, could potentially keep the UK locked into EU rules on a permanent basis. Brady says, "if we can get the vote on my amendment then the Prime Minister gets enormous firepower to go back to the EU."

The amendment has yet to be selected by the Speaker of the House of Commons, but we see it hard for the John Bercow to ignore an amendment put forward by someone as prominent as Sir Graham Brady, who is effectively the most senior backbench MP in the Conservative party.

The big question being asked on Monday is whether the government will officially get behind the amendment and force their MPs to vote for it, if they do the amendment stands a good chance of passing. We know Cabinet has not endorsed the plan, and we would likely only get a definitive view on the matter following Tuesday's regular cabinet meeting. Brady says he hopes to get government support for his amendment.

"I have heard it from the lips of very senior sources in government – speaking with the authority, it is claimed, of the Prime Minister herself – that this country is about to seek proper binding legal change to the current lamentable withdrawal," says Boris Johnson, the former Foreign Secretary, writing in The Telegraph. The article suggests Johnson has softened his lines on his opposition to the Brexit deal, which when added to similar softening from the DUP last week, leads us to believe May's deal is by no means dead.

Describing the plans as "unadulterated good Brexit news", Johnson says an exit mechanism or sunset clause will "defuse the booby trap" and give the UK a "way out".

However good this idea might be for securing unity in the Conservative party, the problem with pursuing changes on the Irish backstop is that EU officials continue to stress the matter is not open for negotiation.

Simon Coveney, Ireland's Foreign Minister and Deputy Prime Minister, this weekend told the BBC that he was wary of the British parliament deciding on something that might command a majority in Westminster, but ultimately has no chance of getting agreement or ratification in the EU.

"The European Parliament will not ratify a withdrawal agreement that doesn't have a backstop in it - it's as simple as that," says Coveney. Last week the European Parliament confirmed they would not ratify any deal put before them that did not contain the backstop.

We believe the EU still have the option of attaching a legal codicil onto the Withdrawal Agreement which is effectively an attachment that has legal force. Pound Sterling Live called this outcome back in December, and we have just heard Sir Graham Brady telling Adam Boulton on Sky News that he believes a codicil could be one way the EU can give legal assurances to the UK and not have to open negotiations on the backstop.

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Pound Rally hits the Pause Button

Pound Sterling has rallied through the course of 2019 as markets grow increasingly confident that progress on Brexit was being made and a 'no deal' Brexit would be avoided.

However, the latest developments confirm to us that there is much work to do before unity can be found amongst the Conservative party and between the UK and the EU. The puzzle is far from solved, and the prospect of disappointment must be guarded against, particularly given how fast the Pound has moved higher.

Viraj Patel, FX & Global Macro Strategist at Arkera, says the British Pound rally "may hit a pause" as, "Westminster looks to be on a collision course with EU over backstop."

"After a good run look for the pound to take stock. GBP's rally has been justified as markets price out no deal Brexit risks (this will provide a backstop to Sterling). But calls for 'no Brexit' seem misguided with PM rallying behind Tory hardliners. This will disappoint some GBP bulls," says Patel.

Foreign exchange strategists at Goldman Sachs have meanwhile urged caution on expecting further gains in the Pound this week.

"GBP has taken comfort in the fact that wheels are in motion for parliament to try to prevent a no-deal outcome, even if the precise mechanism remains unclear. We continue to think this is right, although with EUR/GBP near the lows of the year we likely need to see more concrete steps to reduce no deal uncertainty to meaningfully break below current spot levels—something that is not guaranteed this week," says Zach Pandl, an analyst at Goldman Sachs.

The Pound rallied to its highest level against the Euro since April 2018 last week when the exchange rate hit 1.1602 while the Pound hit its highest level against the Dollar since October at 1.3218.

The gains have come amidst a growing belief parliament has found the means to prevent a 'no deal' Brexit. Recall that while the Brady amendment is something that offers a way forward, so too is the Cooper-Boles amendment which seeks to grant parliament the power to instruct the government to delay Brexit beyond March 2019.

Markets are betting the amendment affords the EU and UK more time to secure a deal, which is ultimately positive for Sterling.

We fell the immediate risk to Sterling would be a defeat of Cooper-Boles amendment, as this would see odds of a 'no deal' Brexit rise sharply once more.

Time to move your money? Get 3-5% more currency than your bank would offer by using the services of foreign exchange specialists at RationalFX. A specialist broker can deliver you an exchange rate closer to the real market rate, thereby saving you substantial quantities of currency. Find out more here.

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