The Pound Today: Impressive Gains Give Way to Caution as Markets Await Dominos to Fall into Place

Above: May greets Juncker on arrival in Strasbourg. Image © European Union , 2019 / Source: EC - Audiovisual Service

- May claims to have secured legally binding changes to Brexit deal

- Verdict of Attorney General Cox key risk event for Sterling today

- Pound off overnight highs as market adopts wait-and-see approach

The British Pound rose to record fresh multi-month highs against the Euro and rallied towards recent multi-month highs against the Dollar following a last-gasp attempt by the EU and UK to secure a Brexit deal.

Overnight, UK Prime Minister Theresa May flew to Strasbourg to meet European Commission President Jean-Claude Juncker to learn of the final concessions on offer from the EU.

Foreign exchange markets welcomed news that the trip was happening and bid Sterling sharply higher through the London afternoon and evening session in expectation that the EU's offer would be enough to give the deal a chance of being passed by the UK parliament on Tuesday.

Following talks in Strasbourg - the seat of the EU parliament - it was announced that a new political agreement on Brexit had been reached that includes 'legally binding' assurances that the UK cannot be locked into the Irish backstop on an indefinite basis.

European Commission head Jean-Claude Juncker said an updated Brexit deal had been agreed between the EU and UK to try and make the agreement more palatable to UK lawmakers but warned they would not get a third chance to endorse it.

At a joint news conference with May in Strasbourg, Juncker said the amended deal provided "meaningful clarifications and legal guarantees" before votes in the House of Commons on Tuesday.

The Pound-to-Euro exchange rate rallied towards 22-month highs at 1.1792, before retreating to be quoted at 1.1727 at the current time. The Pound-to-Dollar exchange rate rallied to a high at 1.3284 before paring gains back to 1.3197.

"Following the joint press conference last night, UK bookmakers have marked up the probability of tonight’s bill passing through the Commons to 30% from 10% late yesterday, which is probably a fair reflection of what is priced into GBP. If the bill does pass, or falls by a small margin, expect further GBP gains, but within limits," says Adam Cole, a foreign exchange strategist with RBC Capital Markets.

While currency markets have welcomed signs of progress, Sterling's hesitancy on Tuesday suggests there is no clear guarantee that the Brexit deal will pass the UK parliament. There were expectations that a narrow defeat on Tuesday would allow May to bring the deal back for a third vote, however we don't see material changes coming from the EU after the latest concessions. 

"There will be no third chance. There will be no further interpretations of the interpretations, no further assurances of the re-assurances – if the meaningful vote tomorrow fails," Juncker said in Strasbourg.

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What's Changed?

Over recent weeks the UK and EU have been locked in discussions over how changes can be made to the so-called Irish backstop clause contained within the Withdrawal Agreement of the Brexit deal. UK parliamentarians voted overwhelmingly to reject the deal in January, with a swathe of Conservative party MPs citing the backstop as the reason: In short it could tie the UK into the EU's customs union and single-market indefinitely.

While the Withdrawal Agreement has not been renegotiated, further work was done on the mechanisms that would allow the UK to exit the backstop if it felt it needed to.

There are three elements to the deal agreed overnight.

1. The joint interpretative instrument. This is a legal document which gives weight to the political guarantees made by the EU in January that the Irish backstop is not intended to be permanent. "It will have equal legal force to the withdrawal agreement and will be lodged alongside it as a treaty at the UN in Geneva," reports Francis Elliot, Political Editor at The Times. "It also makes clear that an independent arbitration panel could allow Britain “proportionately” to suspend its obligations under the backstop if the EU breaches its undertaking to try to negotiate a new free-trade deal in good faith."
2. Changes to the political declaration. The changes commit the EU more decisively to finding alternative "technical arrangements" to solve the Irish border question.
3. Unilateral exit. It was agreed that the UK could make a unilateral statement that nothing can prevent it pulling out of the backstop if talks about a future relationship with the European Union after Brexit break down. If the backstop comes into force and talks on the future relationship break down with no prospect of an agreement, May said the declaration would make clear: "it is the position of the United Kingdom that there would be nothing to prevent the UK instigating measures that would ultimately dis-apply the backstop. The full declaration can be read here.

According to Elliot, it is the political declaration that held up agreement in Strasbourg, with Ireland leading objections.

This suggests to us that it might just have enough clout to convince opponents to the Brexit deal that enough has been done to ensure it can never be indefinite.

Is it Enough?

Tuesday evening sees parliament vote on the Brexit deal, and the new assurances from the EU widely expected to whittle down opposition to the deal.

But will it be enough to allow the deal to pass?

Thus far reactions by the key players required to push the deal across the line have been guarded, and we expect statements to be made through the course of Tuesday that should give us a sense of how parliament is thinking.

Firstly, the interpretation of the new deal by the Attorney General Geoffrey Cox will be watched as he will tell MPs whether or not the changes do in fact give the UK the ability to legally exit the backstop.

If he says yes, we would suggest the deal has a greater chance of passing which in turn amounts to a positive development for the British Pound.  If he says, no, the opposite applies.

The reaction of Northern Ireland's DUP party will be important: has enough been done to allow the 'king makers' of the UK parliament to back the deal? We believe that at the very minimum the DUP must accept the deal not simply because of the numbers they provide the government in parliamentary votes, but because of the ideological steer they provide on the issue of the Irish border. Many of those who voted against the deal back in January would likely back the deal if the DUP did so.

"As of now, we still expect May to suffer another defeat despite the new Brexit deal but it depends on how well it is received, especially by the supporting DUP party," says Mikael Olai Milhøj, Senior Analyst with Danske Bank. "If the DUP backs the deal, it is a potential game changer, as many Brexiteers will likely follow suit."