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Pound Sterling Recovers Ground from Euro and Dollar after EU Council Decision Increases Scope for an Exit-from-Brexit

© European Union, reproduced under CC licensing

- GBP rebounds after EU leaves door open to an exit-from-Brexit.

- 3rd rejection of Withdrawal Ag to demand new way forward says Tusk.

- May eyes indicative votes, enabling MPs to push "soft Brexit" options.

- DUP says May "missed an opportunity", rejects Withdrawal Agreement.

Sterling staged a strong riposte against the Euro and Dollar Friday after the European Council left the door open for the UK to request a lengthy postponement of its already-delayed exit from the bloc, which could ultimately give way to another referendum, general election or a new Brexit policy. 

The European Council said Friday it has officially agreed to offer an extension of the Article 50 negotiating window that will run from March 29 to May 22, so long as the House of Commons approves Prime Minister Theresa May's EU Withdrawal Agreement next week. 

However, if the House of Commons rejects the bill for a third time then the country will receive an extension that runs only until April 12, at which point MPs will choose between a so-called no deal Brexit and a much longer extension requiring participation in EU elections while politicians establish a way forward. 

"If the United Kingdom is still a Member State on 23-26 May 2019, it will be under the obligation to hold the elections to the European Parliament in accordance with Union law," the Council says. "The United Kingdom would have to give notice of the poll by 12 April 2019 in order to hold such elections."

Above: British Pound performance against G10 rivals on Friday. Source: Pound Sterling Live

Some EU officials including the Council's Tusk have made no secret of their desire to see the UK vote again on the Brexit question, and some have met repeatedly with members of the opposition including Labour Party leader Jeremy Corybyn.

Corbyn and much of the Labour Parliamentary party, despite having its base of support located in many of England's leave-backing constituencies, has been advocating an even closer relationship with the EU than PM May has proposed. They're also backing the idea of another referendum.

PM May said in Brussels Thursday it would be "wrong" to ask people in the UK to participate in EU elections three years after voting to leave. But that is what will happen if the EU Withdrawal Agreement is not passed in the next week and comments from MPs in the UK suggest the odds of that happening are still no better.

However, May's earlier letter to the Council revealed that an amendable but non-binding motion will be put to MPs next week giving them an opportunity to push the process and government in a new direction.

Parliament rejected a the idea of another referendum once before in March but that doesn't mean advocates of such a thing won't attempt to convince MPs again next week. Neither does it mean that other changes in policy couldn't be proposed either.

"The Prime Minister has now agreed with the EU to kick the can down the road for another two weeks and humiliatingly revoke her oft-stated pledge that the U.K. would leave the EU on 29th March. Nothing has changed as far as the Withdrawal Agreement is concerned," says Nigel Dodds, deputy leader of the Democratic Unionist Party (DUP) of Northern Ireland. "The Prime Minister missed an opportunity at the EU Council." 

DUP votes in parliament are the key to many Conservative Party MP's votes. And the party appears resolved to continue voting against PM May's bill. Dodds hinted Friday that the DUP has not yet given up on the idea of forcing the EU to reopen talks over PM May's signature piece of legislation.

"As we have always said, negotiations with the EU inevitably go down to the wire and the Government has been far too willing to capitulate before securing the necessary changes which would get an agreement through the House of Commons. The Government has consistently settled for inferior compromises when they didn’t need to and when there was, and is, more negotiating with the EU to be done," Dodds says, in an official party statement.

The Telegraph reported Friday that "growing numbers" of Conservative Party MPs are demanding that PM May resigns over her handling of the UK's exit, or non-exit, from the EU. Some of those MPs made their frustration clear on social media.

French President Emmanuel Macron had hinted on Thursday that he might 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 that was rumoured 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. 

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

"The vast majority of FX investors misread the political climate in the UK and called the result of the June 2016 referendum wrong," says Stephen Gallo, European head of FX strategy at BMO Capital Markets. "We detect that a similar confirmation bias is in play in the FX space again."

The Pound-to-Euro rate was 1.26% higher at 1.1689 at the London close Friday and has risen 5.1% so far this year. All Sterling exchange rates have been volatile in 2019, but particularly so during the month of March.

"The failure of EURGBP to test much higher levels suggests that the global appetite for EURs is justifiably soft for a number of reasons, and many of them are home-grown.," says BMO's Gallo. "The EUR will not get a “free lunch” at the GBP’s expense regardless of what becomes of Brexit. The Eurozone is displaying numerous hallmarks of a “zombie economy” and it is a laggard in the global race for capital."

The Pound was quoted 0.48% higher at 1.3183 against the Dollar and is up 3.2% this year. However, this exchange rate has been impacted by a highly volatile U.S. Dollar, which has swung wildly in response to geopolitical and monetary policy developments this week. 

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

MPs have rejected the Withdrawal Agreement twice already, for a variety of reasons, although Sterling's future fortune will still be determined entirely by whether the country leaves the EU with or without a deal preventing tariffs from being imposed on goods exported to Europe. It is the "no deal" scenario that markets fear. 

However, unless and until 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. That date is now moving to April 12.

The UK already trades succesfully under WTO terms with some of its largest and fastest growing markets including the U.S. and China but analysts are unanimous in their verdict that such a relationship with the EU would be bad for the economy. 

PM May's EU Withdrawal Agreement, combined with promised made to the DUP, already looks likely to lead to a form of "soft Brexit" where the UK remains within the EU's customs union and to an extent, its single market (regulatory area). And failure to approve it will simply lead to a long delay to Brexit and possible even its abandonment. 

That means there should be few reasons for markets to be concerned about a so-called "no deal Brexit" and selling Pound Sterling. However, and as far as the technocratic letter of the law goes, such a thing is still on the table and so investors will continue to offer the Pound lower each time they perceive a "no deal" to be becoming more likely.

Analysts often say that if a WTO terms no-deal Brexit were to happen it would quickly see the Pound fall to parity with Euro, and to at least 1.20 against the Dollar. But not everybody is on exactly the same page.

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

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 was geared toward allaying unionist concerns about the backstop leading to a "breakup of the United Kingdom" but its tantamount to making a 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. 

"We will not accept any deal which poses a long term risk to the constitutional and economic integrity of the United Kingdom," NIgel Dodds says, on Friday.

May's pledge could become 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 now 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. 

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 is 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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