The Pound Drops on Parliament Suspension, but Downside Limited by Hope of Brexit Deal Progress with EU
Above: Prime Minister Boris Johnson at the just-held G7 Summit. Image © Gov.uk
- Queen agrees to suspend parliament from mid-September until October 14
- MPs unlikely to have enough time to introduce law to block no deal
- Sterling drops from recent highs on news
- But, chances of a Brexit deal being struck have improved markedly
Pound Sterling fell in mid-week trade on news the Queen has agreed to the government's request for a prorogation of parliament from mid-September until October 14, in a move that greatly reduces the ability of parliament to prevent a 'no deal' Brexit.
The government of Prime Minister Boris Johnson requested the Queen suspend parliament between 9 and 12 September through to October 14, in a move that has upset many remain-leaning politicians who are now left with very little time within which to introduce legislation that would effectively prevent the Prime Minister from taking the UK out of the EU without a deal.
The Pound fell sharply when news of of the impending suspension first broke, with markets gauging that the Brexit pendulum was once again swinging back towards a 'no deal' Brexit. However, the UK currency has since pared its a good deal of its losses leaving its recent gains intact amidst a belief the EU and UK will ultimately clinch a late-minute deal.
The Pound-to-Euro exchange rate is quoted at 1.1023 at the time of writing, having been as low as 1.0963 in the wake of the news parliament would be suspended.
The Pound-to-Dollar exchange rate is quoted at 1.2206, having been as high as 1.2159 earlier today.
The market's reaction looks to be relatively sanguine when contrasted to the political froth the decision by Johnson to suspend parliament has stirred up.
However, if we cut through the noice we can see nothing entirely remarkable has happened.
A new government typically has the right to suspend a session of parliament before opening a new session in which its legislative timetable is presented, debated and voted on.
Johnson argues he needs to bring in a new session of parliament and a new agenda to make progress on domestic reforms. “We need new legislation, we’ve got to bring forward new and important bills, and that’s why we need a Queen’s Speech... there will be ample time either side of EU summit for MPs to debate Brexit. Ample time,” said Prime Minister Boris Johnson, in his first comments following the news.
Johnson adds it is "completely untrue" he is going to prorogue parliament to stop MPs blocking a 'no deal' Brexit.
However, remain-leaning MPs were gearing up to use the current parliamentary session to effectively thwart Johnson's plans on Brexit: the argument is this is a cynical ploy by Johnson to ensure parliament's power on prevent a 'no deal' Brexit is effectively neutered.
Above: Sterling pares gains against the Euro on news parliament will be closed from mid-September until October 14
"The proroguing of Parliament leaves an incredibly narrow window for Parliament to legislate the move, agree to an Article 50 extension or organise a no-confidence motion," says Derek Halpenny, Head of Research for Global Markets EMEA and International Securities at MUFG. "A no-deal Brexit is looking ever more likely. GBP downside risks will continue to plague the market. It is only a matter of time until the recent GBP/USD low of 1.2015 is brought even lower. The MUFG base case no-deal Brexit assumption and our current year-end target of 1.1000 remain intact.”
SNP leader Nicola Sturgeon says "unless MPs come together to stop him next week, today will go down in history as a dark one indeed for UK democracy."
Meanwhile, Labour leader Jeremy Corbyn, Liberal Democrat Leader Jo Swinson and Change UK leader Anna Soubry have all written to the Queen requesting an audience.
It is unclear what such an audience would be able to achieve.
What is more certaint is that those MPs looking to block a 'no deal' Brexit via legislative means will effectively have to bring forward proceedings to September 03 when parliament opens, making next week an almighty one for domestic politics.
"It’s not 'as bad' as proroguing parliament completely but it’s reduced the time MPs had in October to block a no deal. For GBP to recover the fall this morning rebel anti-no deal MPs will have to get their acts together in the first weeks of September. No more delaying," says Jordan Rochester, a foreign exchange strategist with Nomura.
We would also expect today's developments raise the prospect of the Labour Party calling a vote of no-confidence in the government next week, in order to try and thwart Johnson's plans.
However, a Number 10 source tells ITV's Political Editor Robert Peston that, "if MPs pass a no-confidence vote next week, then we'll stay in No10, we won't recommend any alternative government we'll dissolve Parliament and have an election between 1-5 November - and that means no time for legislation”.
A Number 10 source tells Peston that the legality of suspending parliament for a month is entirely proper: “lawyers are absolutely confident the courts cannot interfere with a bog standard Queen’s Speech process. No10 has been extremely careful to do everything by the book in the normal way. There’s no precedent for the courts having any locus on this.
“This process [of proroguing or suspending parliament prior to Queen’s Speech] is ancient, so there is no scope for legislation [to stop it] or judicial review.”
it would seem that Johnson is taking firm control of the Brexit agenda, and in doing so ultimately puts the onus on the EU to agree to a new Brexit deal in order to avoid a 'no deal' Brexit.
By opening parliament again on October 14 Johnson also gives himself just five days before a critical European Council meeting where Johnson’s hopes of striking a new Brexit deal will be determined.
Two weeks after the Council meeting is the Brexit deadline: Johnson will set himself a useful playing field whereby voting through his deal is the only option available to parliament staring down a 'no deal' with no effective alternative legislation.
From a currency perspective, we note Sterling has fallen, but by the afternoon session the worst of the declines were reversed and we would suggest that while latest developments are not constructive for Sterling, they are by no means reason enough for a massive sell-off.
Markets have arguably always known parliament's chances of stopping a determined PM from delivering Brexit at all costs were scant: what matters is whether or not the UK and EU strike a revised deal that parliament is able to ratify.
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Why a Brexit Deal is Still Likely
Ahead of this news, Sterling was looking good on currency markets with foreign exchange traders seeing improved chances for a Brexit deal being struck in the run up to the October 31 Brexit deadline thanks, in part, to Prime Minister Boris Johnson's strategy of focussing almost exclusively on removing the Irish backstop clause from the treaty.
Because Johnson is not tearing up the entire Withdrawal Agreement, EU leaders appear more willing to engage on the matter of the Irish border, and Johnson appears to believe concessions here will be enough to get a deal across the line in parliament.
According to a Financial Times report, Johnson has reassured German Chancellor Angela Merkel and EU Commission President Jean-Claude Juncker that if the EU agreed changes to the backstop it would not lead to demands for a wider rewriting of the exit treaty.
“We have been clear the changes we seek relate to the backstop,” confirmed a Downing Street spokesperson.
According to one analyst, this could well be what is driving Sterling's latest recovery.
"Over a 5-day period, the Pound is currently the top performing G10 currency on building optimism of a potential meeting of minds between the UK and the EU. Some of that gain came yesterday fuelled by comments from PM Johnson’s spokeswoman confirming that the focus of change to the Withdrawal Agreement was only on the Irish backstop," says Derek Halpenny, Head of research for Global Markets EMEA at MUFG in London.
The Pound-to-Euro exchange rate had risen to 1.1047 earlier in the day, having been as low as 1.0724 on August 16. Meanwhile the Pound-to-Dollar exchange rate had risen to 1.2260 having been as low as 1.2016 on August 16.
Above: Sterling's gains against the world's major currencies over the course of the past 5 trading days.
"Although further political imponderables are to be expected after the summer recess, I consider the EU's willingness to engage in dialogue to be thoroughly positive. This would have been inconceivable a few weeks ago! Sterling is still historically cheap. Against the background of a potential reopening of negotiations between the EU and Britain, I remain cautiously optimistic," says Marc-André Fongern at MAF Global Forex.
It is clear that in order to facilitate a deal Johnson is likely to accept existing facets of the Withdrawal Agreement, including a transition period that sees the UK remain in the single market and customs union while a final trade deal and future relationship is thrashed out by negotiators.
Furthermore, the so-called divorce bill of £39BN will remain intact.
“What this is signalling to France and Berlin is that Johnson is not looking for a war with the EU on a swathe of other issues,” Mujtaba Rahman, managing director of the Eurasia consultancy group, told the FT.
However, some Brexiteers suggest the Prime Minister must go further and ditch the entire agreement: names here include Conservative MPs Iain Duncan Smith, David Davis, and Bill Cash. We would imagine there would be a larger cabal of MPs that agree with this stance, and we are wary that Johnson faces an undiminished Conservative Eurosceptic movement as did his predecessor Theresa May.
After all, Johnson did say on June 25 at a meeting with Conservative Eurosceptics that "the Withdrawal Agreement is dead", adding that "serviceable bits" will be maintained.
Brexiteers might therefore have ammunition to cry "betrayal".
Mark Francois - a vocal critic of the Brexit deal - has warned Johnson that he and other colleagues will block any attempt to pass the agreement again – even if the Irish backstop is removed. “He was absolutely emphatic about it, so we took him at his word. I don’t think you could revive the withdrawal agreement realistically. Even if you took the backstop out, there are too many other things that are wrong with it,” said Francois in a recent podcast.
Nevertheless, from a currency market perspective, Johnson's step back is constructive as "now we have the most explicit acknowledgement at an important moment that the government is not seeking any other changes," says Halpenny.
And make no mistake, the EU have also taken a major step back by acknowledging that it is in fact possible to renegotiate a part of the Withdrawal Agreement and that the Irish backstop can be looked into. Previously, changes to both were outright rejected by EU leaders and officials.
Further support for Sterling came on Tuesday after MPs opposed to Brexit look for ways to prevent a 'no deal' exit via legislative means in the House of Commons.
Labour leader Jeremy Corbyn and other opposition leaders on Tuesday agreed to seek legislation to prevent Johnson from him fulfilling a pledge to take the UK out of the EU at the end of October “come what may” in the event that no new deal between the EU and UK is struck.
Over the course of the summer it had been expected that Corbyn would launch a no-confidence vote challenge on Johnson in an attempt to bring down the government, thereby preventing a 'no deal' outcome.
This idea has apparently lost support as Corbyn's demand of other opposition parties was that they install him as Prime Minister in a caretaker capacity.
"The Pound found support as investors latched on to more positive tones between London and Brussels, as well as manoeuvres in the House of Commons in an attempt to block a no deal," says Hann-Ju Ho, an economist with Lloyds Bank.
The details of any legislative package that might succeed in providing an insurance against a 'no deal' should become known next week when parliament returns from the summer holiday break and could provide some further upside potential in Sterling.
"Parliament’s return next week could see positive tail risks creep into pricing," says Jordan Rochester, a strategist with Nomura, the Japan-based global financial services provider.
We note however that Johnson's chances of striking a fresh deal with the EU are greatly diminished if EU leaders believe MPs opposed to Brexit can succeed and prevent a 'no deal'. If MPs succeed, an incentive for the EU to shift stance is removed introducing the prospect that Johnson pursues unusual measures to deliver on his pledge.
This would only increase anxiety and grow pressure on Sterling's valuations.
The situation therefore remains fluid and we expect Sterling to remain highly sensitive to the news headlines.
"Markets will continue to be on the lookout for Brexit developments, especially on whether there are any hints of the EU moving towards PM Johnson’s request to reopen the Withdrawal Agreement," says Ho.
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