Pound Sterling Extends Losses against Euro and Dollar after France's Macron Hints at "No Deal" Ultimatum for Parliament

© Number 10 Downing Street 

- GBP slips after Macron issues a "no deal" ultimatum to UK Parliament. 

- EU insists on Withdrawal Ag approval before Art 50 extensions granted.

- Next Parliament vote key to outlook for Brexit and GBP exchange rates.

The Pound extended losses against the Euro and Dollar in noon trading Thursday after it became clear European leaders could be planning to use the threat of a "no deal Brexit" to bounce the UK Parliament into backing Prime Minister Theresa May's EU Withdrawal Agreement. 

French President Emmanuel Macron hinted strongly on Thursday that he will veto Theresa May's requested extension of the Article 50 negotiating window if the House of Commons has not approved the EU Withdrawal Agreement before another European Council summit planned for next week. 

“We must be clear, to ourselves, our British friends and our people. Firstly, we’ve been negotiating the withdrawal agreement for two years. It cannot be renegotiated. Secondly, in the event of another no vote in Britain, we will be heading towards a no deal,” Macron told reporters in Brussels. 

Jean-Claude Juncker, head of the European Commission, said Thursday that if the House of Commons rejects the Withdrawal Agreement a third time then there will have to be another meeting in Brussels.

PM May requested on Wednesday a 90-day extension to the Article 50 window, intended to run between March 29 and June 30, in order to attemp to get more MPs to support her proposed exit from the EU. 

But Brussels had already said that it won't support an extension beyond the date of the May European parliament elections and that MPs in the House of Commons would first need to back her Withdrawal Agreement before any such thing is granted.

MPs have rejected the Withdrawal Agreement twice already, for a variety of reasons, and now the Speaker of the House of Commons has said the bill cannot be put back before MPs again until it changes meaningfully in substance.

Above: Brexit predictions. Source: Thomson Reuters/Refinitive.

The EU has said it won't reopen the Withdrawal Agreement. However, May set out in a letter to the European Council on Wednesday her belief that fresh assurances given to her over the so-called Northern Irish "backstop" contained in her Withdrawal Agreement will be enough to change the substance of it. 

Ultimately, Sterling's fortune will be determined in the months entirely by whether the EU Withdrawal Agreement passes the House of Commons on the next asking, assuming that PM May is able to put it before MPs again. 

If it does pass, the UK will likely be granted a short extension to enable ratification of the agreement, although if the rhetoric of European heads of state and EU Commission officials is to be believed then there will be a "no deal Brexit" if the Treaty is rejected a third time by MPs. 

"PM May has clearly buckled again under pressure from the Brexiteers. She now hopes that MPs will also buckle under the pressure posed by the imminent risk of a “No Deal” Brexit and pass her deal in a third meaningful vote before the end of this month. Unfortunately, it remains highly doubtful that repeating the same thing over and over again will yield a different result," says Lee Hardman, a currency analyst at MUFG.

Unless and until an extension is agreed or PM May's agreement is backed by parliament, the course of action currently enshrined in law will see the UK leave the EU on March 29 and default to doing business with it on World Trade Organization (WTO) terms. 

For those who are looking simply to see a stronger Pound Sterling, that would be the worst possible outcome.

Above: Pound-to-Euro rate shown at daily intervals.

The Pound-to-Euro rate was -0.21% lower at 1.1530 but has risen 3.69% so far this year. All Sterling exchange rates have been volatile in 2019, but particularly so during the month of March.

"The best outcome for the pound in the near-term would be if the intensified pressure proves successful in passing a Brexit deal by the end of this month. It could lift cable lift towards the 1.3600 level and lower EUR/GBP further below the 0.8500-level [GBP/EUR: 1.17]," says MUFG's Hardman. "However, the odds currently do not look good for such a favourable outcome."

The Pound was quoted -0.71% lower at 1.3111 against the Dollar following Macron's statement. Previously it had recovered some of the day's loss, reaching 1.3168 following the March interest rate decision of the Bank of England (BoE).

"GBP/USD is easing lower and should shortly encounter the short term uptrend at 1.3034," says Karen Jones, head of technical analysis at Commerzbank. "Provided that dips lower are contained by the short term uptrend, our overall target remains the 1.3574 200 week moving-average. Below the 1.3034 short term uptrend lies the double Fibonacci retracement at 1.2900/1.2895. This guards the recent low at 1.2772."

Above: Pound-to-Dollar rate shown at daily intervals.

MUFG's Hardman says a third rejection of the Withdrawal Agreement will see the UK and EU forced to choose between a much longer extension of the Article 50 window and a so-called no deal Brexit, which is in other words, leaving and trading under WTO terms.

Many say that would see the Pound-to-Euro rate fall toward parity and the Pound-to-Dollar rate decline to at least 1.20.

"It remains my intention to bring the deal back to the House. In advance of that vote I would be grateful if the European Council could therefore approve the supplementary documents that President Juncker and I agreed in Strasbourg, putting the government in a position to bring these agreements to the House and confirming changes to the government's proposition to parliament," May told the European Council's Donald Tusk on Wednesday. "I also intend to bring forward further domestic proposals that confirm my previous commitments to protect our internal market, given the concerns expressed about the backstop." 

The Prime Minister has previously told the Democratic Unionist Party that if the so-called "Northern Irish backstop" within the EU Withdrawal Agreement is activated then any new EU law or regulations imposed on the province will also be imposed on the UK as a whole. 

That promise appeared geared toward allaying unionist concerns about the backstop leading to a "breakup of the United Kingdom" but its tantamount to making customs union and some level of single market membership the default outcome in the event the UK cannot or will not satisfy the EU's demands in the next stage of the negotiations, whatever those demands turn out to be. It will be a potentially-indefinite arrangement enshrined in an international treaty. 

It could become part of official policy next week when PM May puts it and other proposals to the House of Commons in an amendable and non-binding motion that is seemingly intended to heap pressure onto Brexiteers within the Conservative Party, who the PM hopes will eventually back her Withdrawal Agreement.

Passing the motion through the commons will likely require support from the opposition because, as much as many of the government's MPs will back it, most of the Brexiteers in parliament also happen to be Conservative Party MPs and have already said they won't countenance such policy. 

However, the rub for opposition MPs and Brexiteers is that after the non-binding "soft Brexit" motion gets the nod the Prime Minister intends to put her EU Withdrawal Agreement before Parliament again.

May is betting it'll receive enough support to pass this time around, presumably because of the threat seemingly posed to Brexiteers by the non-binding motion, even though backing the Withdrawal Agreement looks likely to lead toward exactly the same kind of outcome as the non-binding motion would deliver if it dictated the process.

The backstop enshrines in an international Treaty a commitment that will see the government forced to impose on the UK many existing and yet-to-be-made EU laws on a potentially-indefinite basis and without any ability to influence those laws or EU institutions. The UK will also form part of the EU's customs territory.

That's unless, of course, the UK is willing to allow Northern Ireland to be annexed by the EU in the event the backstop is activated. Or, unless the government is able and willing to satisfy the EU's demands in the next stage of the negotiations, whatever those demands eventually turn out to be.

Such a structure could be said to create an incentive for the EU to remain perpetually unsatisfied with UK proposals for the future relationship. This why many MPs have expressed deep-seated opposition to the EU Withdrawal Agreement and some have even gone so far as to describe it as a trap.

PM May has said repeatedly that "no British Prime Minister" could agree to see Northern Ireland annexed, which leaves only one other possible outcome in the event Brexiteers give way and back the withdrawal agreement later on this month. That's customs union and some level of "single market" membership.

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