The Pound Sterling: Advancing against Euro as Brexiteer Dominoes Fall, but DUP Stands Firm

British Conservative Party politician Jacob Rees-Mogg. Picture taken March 21, 2018. REUTERS/Toby Melville

- MPs to take control of House Wednesday for "indicative votes".

- MPs set to make preferences on customs union, referendum known.

- But Gov cannot be bound by indicative votes, PM May controls agenda.

- Rees-Mogg says choice between May's deal or no Brexit, ERG to meet.

- DUP MP says PM's deal "not Brexit" and threatens union, urges rejection.

- April 12 brings choice between No Deal and another Art 50 extension. 

The Pound advanced against the Euro Tuesday after leading Brexiteer Jacob Rees-Mogg hinted that he is on the cusp of backing Prime Minister Theresa May's EU Withdrawal Agreement, as the market awaits Parliament's next steps in the Brexit saga. 

Jacob Rees-Mogg, head of the influential European Research Group of MPs, said Tuesday that it appears the only available choice is between  May's contentious and twice rejected EU Withdrawal Agreement, and no Brexit at all. 

The comment was an apparent reference to his thinking on the predicament now facing the few Brexit-supporting MPs in Parliament, since the House of Commons voted to sieze control of the Parliamentary agenda on Wednesday.

Market focus has now turned toward April 12, which will see see government choose between a further extension of the Article 50 negotiating window and leaving the EU without a withdrawal agreement if the House of Commons has not backed the EU Withdrawal Agreement by then. 

The European Research Group of MPs is set to meet on Tuesday evening, presumably to discuss a way forward, although it remains far from clear whether Rees-Mogg's change of position will be enough to tip the balance for the EU Withrawal Agreement. 

The Democratic Unionist Party (DUP), upon which the government depends for a majority, has so-far stood firm in the face of mounting pressure on opponents of the EU Withdrawal Agreement. 

"There are some colleagues who I admire greatly and who have stood firmly with us in defending Northern Ireland who now take the view that the Withdrawal Agreement, even though it is a rotten deal, is better than losing Brexit. To them I say that, if the deal goes through, we have lost our right to leave the EU. If we sign up to it, we give away our right to leave to the whim and dictates of the EU. That is not Brexit," says Sammy Wilson, a DUP MP, in The Telegraph.

The DUP and other unionists have concerns about the so-called Northern Irish backstop in the EU Withdrawal Agreement. 

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 effectively annexed by the EU in the event the backstop is activated, in which case only Northern Ireland will be subjected to that treatment.

Once May's agreement is in force, the backstop could only be circumvented through the Prime Minister of the day satisfying the EU's demands as they relate to the "integrity of the single market" and adherence to the Belfast Agreement in the next stage of the negotiations.

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.

"The Withdrawal Agreement itself means no Brexit. It ensures that the EU has the legal power to prevent us ever leaving except on their draconian terms, which would include a Customs Union and adherence to EU regulations. Those who negotiated the agreement have been quite open about that," Wilson adds. "We have worked assiduously with the Government to try to get changes to the agreement and will continue to do so, but we will not vote for an unamended or unchanged version."

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

The Pound-to-Euro rate was 0.34% higher at 1.1719 around the London close Tuesday, and is up 5.4% for 2019. All Sterling exchange rates have been volatile in 2019, but particularly during the month of March.

"A cliff edge on April 12 would likely result in the pound plunging lower. We would risk on this scenario of EUR/GBP heading toward parity [GBP/EUR @ 1.00] and cable lurched down below GBP/USD 1.15. That said, various other possibilities are being discussed about what could happen if parliament again rejected May’s deal next week," says Jane Foley, a currency strategist at Rabobank. 

The Pound was quoted 0.05% higher at 1.3221 against a softer Dollar and has risen 3.7% this year. This rate has been impacted not only by Brexit-related volatility, but also by big swings in the Dollar of late. 

"GBP/USD continues to recover from the 55 day moving-average (MA). It has held over the 200 day ma at 1.2980 and for now we will continue to favour the topside," says Karen Jones, head of technical analysis at Commerzbank. "Provided that dips lower are contained by the 200 day ma, our overall target remains the 1.3563 200 week ma."

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

Prime Minister Theresa May told the House of Commons Monday that she has not yet set a date for the third vote on her EU Withdrawal Agreement because she cannot be sure that it has enough support among MPs to clear the House. 

She also told parliamentarians that a so-called no deal Brexit will not happen unless there is a majority in the House of Commons for it, before then claiming that she will not allow the government to become bound by "indicative votes" on non-binding motions.

That set the stage for a days-long period of horse-trading between Conservative Party MPs on the back benches and the Prime Minister as she attempts to coerce Brexit-supporting lawmakers in her party into backing her proposed model of withdrawal. 

Above: Parliamentary result for amendment (a) Letwin. 

MPs subsequently decided by a majority of 329:302 to reserve Wednesday's parliamentary business for voting on amendments to a non-binding motion, which is designed to enable them to show the government exactly what their preferred relationship with the EU will look like. 

That amendment had been put forward by Conservative Party MPs Oliver Letwin and Dominic Grieve, as well as opposition MP Hilary Benn. 30 of the government's MPs are said to have rebelled in order to support it and three cabinet members resigned from office to that end. 

Monday's win for opponents of the government could now give way to House of Commons votes on a permanent customs union with the EU, European Economic Area membership, another referendum and a range of other scenarios including the revocation of Article 50.

"While this does not resolve the current Brexit impasse, it is a step in the right direction. As a majority members of parliament (MPs) are in favour of a) retaining close ties with the EU and b) preventing a no-deal hard Brexit, more power for parliament contains the risk of a hard Brexit," says Kallum Pickering, an economist at Berenberg Bank. 

Above: House of Commons votes for and against EU Withdrawal Agreement, March 12, 2019.

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