British Pound Supported on News Corbyn to Soon Back 2nd Referendum
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- Snapshot: GBP/EUR @ 1.1342 +0.04% | GBP/USD @ 1.2631 +0.02%
- Corbyn tipped to soon announce 2nd referendum backing
- Conservative front-runner Johnson told to attend court
- Expectations for future Sterling volatility surge
Labour Party leader Jeremy Corbyn is reportedly set to back a second referendum on Brexit in a move that could increase odds of the UK not ever leaving the EU, a move that could underpin an under-pressure Pound.
An official announcement by Corbyn would confirm hints made over recent days that the party was in the process of shifting its stance in response to the sharp loss of support suffered by the party at the just-held European elections.
The Mirror newspaper reported that a change in policy was coming late on Tuesday, citing senior figures of the party.
"After the exodus of supporters to Remain parties the Lib Dems and Greens amid accusations he was sitting on the Brexit fence, the leader now looks poised to back a people’s vote within days," reports the Mirror's Ben Glaze and Pippa Crerar. "He has been under mounting pressure to get behind a referendum."
We reported yesterday that one of the more significant developments in the post-EU election Labour landscape was a potential pivoting by Labour towards backing a second vote.
"Our only option now is go back to the people in a referendum, and I think that's the position we're in now," said Shadow chancellor and close Corbyn ally John McDonnell in an interview with Sky News.
The move towards officially backing a second EU referendum by Labour sharply raises the prospects of a second referendum taking place and we see the outlook for Brexit being increasingly binary: a second referendum and the potential overturning of Brexit under Labour, or a 'no deal' under a new Conservative Party leader.
What does this mean for the Pound going forward?
Sterling tends to rise when the odds of a 'no deal' Brexit are falling, while Brexit being overturned are seen to be a 'best case' scenario for the currency by many analysts.
Should markets sense the chances of this outcome have increased via the shift in Labour's position then Sterling could well find support, and even reverse some of its recent losses.
"The outcome of Brexit has become more binary, with a reduced chance of a compromise negotiated outcome," says Jacob Nell, Economist with Morgan Stanley in London. "We think the success of the Brexit party is likely to put the Conservatives under pressure to support a harder version of Brexit, while the success of the parties who support staying in the EU is likely to put Labour under pressure to support a second referendum."
Of course there remains an increased chance that a new Conservative leader opts for a 'no deal' Brexit.
But, parliamentary resignations by just a few pro-EU Conservative MPs would leave the new leader unable to govern, thereby hastening the onset of a General Election.
The new leader inherits a shaky and tiny majority in Parliament and we see it unlikely it will hold under a leader gunning for a 'no deal' Brexit.
Lacking a stable majority, a new Prime Minister would have to look at heading to the polls on a 'no deal' Brexit ticket, which in turn opens the door to a Labour government.
Many will argue that Labour would lose the support of its 'heartland' vote which voted overwhelmingly for Brexit if it officially backs a second referendum.
But it must be noted that at a General Election these voters are most likely to 'come back home' and vote Labour as there are other issues apart from Brexit to consider. It must also be noted that even if Labour don't win, they could be in with a chance of forming a coalition with the Liberal Democrats, Greens and SNP, all who favour a second referendum.
Markets recognise that while a 'no deal' Brexit has increased since the Brexit Party stormed the political landscape in the UK and pushed the Conservatives towards adopting a 'no deal' stance, at the same time, a scenario analysis would suggest that the route to the 2016 referendum being overturned has, if anything, now become clearer.
While Sterling is expected to trade lower in an environment of increased uncertainty, there is certainly an argument to be made that the downside would be protected and that losses will have their limits because of the increased clarity on the referendum being overturned.
Of course finding the downside limits to the current run lower is the difficult job.
For the Pound-to-Euro exchange rate, the bottom of a longer-term post-2016 range that has proven to offer support in the past:
"GBP prices are likely to extend lower with 1.1100/1.1025 vulnerable next," says Trevor Charsley, a technical analyst with currency brokers AFEX.
For the Pound-to-Dollar exchange rate the floor is however harder to determine from a technical basis.
The above graph has us looking to the 2019 lows at 1.2446 as a potential level of support.
"Whilst some support has re-surfaced around 1.2600 over recent sessions damage done by the prior sell-off will not easily be repaired. Having failed to establish itself back beyond 1.3000 earlier this year fresh GBP recovery attempts will probably now recognise/respect this same level as resistance," says Charsley.
"Once 1.2645/55 gives way prior 1.2450 lows are then vulnerable next," adds the analyst.
"Near-term rebounds still look corrective, with 1.2740 intra-day resistance currently capping recent gains. While under there, risks remain for another leg lower towards the 1.2550-1.2440 medium-term range support area," says Robin Wilkin, a cross-asset strategist with Lloyds Bank. "At this stage we believe those range lows should hold and a lower range will develop."
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Boris Johnson Told to Attend Court
Headlines hitting the newswire are that the favourite to succeed Theresa May as the UK's next Prime Minister must appear in court.
Boris Johnson has been told to appear before a judge to answer questions of misconduct committed while in office.
The allegations relate to comments made by Johnson during the 2016 EU referendum.
It is claimed that Johnson lied when he said the UK gave the EU £350 million a week.
"Having considered all the relevant factors I am satisfied that this is a proper case to issue the summons as requested for the three offences as drafted," District Judge Margot Coleman said in a written ruling at Westminster Magistrates' Court.
"This means the proposed defendant will be required to attend this court for a preliminary hearing, and the case will then be sent to the Crown Court for trial."
Market Nerves on Sterling Outlook Growing
Expectations for significant volatility in the value of the Pound over coming months are growing.
A gauge of the difference between expected swings in the British pound over the next three and six months rose to its highest level in more than three years as investors anticipated more volatility in the coming months.
Implied volatility gauges, which measure expected swings in the pound in the coming months, have risen since last week.
"There is some evidence the market is beginning to focus on the issue of political risk. In particular there has been a noticeable widening in the gap between six-month at-the-money forward implied volatility over the past two weeks, reaching its widest level since Q1 2016," says Simon Derrick, Senior Currency Strategist with BNY Mellon.
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