Pound in the Red as General Election Odds Rise
Above: The Prime Minister Boris Johnson delivers a statement outside Downing Street. Image © Pound Sterling Live, Still Courtesy of BBC.
- General Election could be called this week
- Johnson backs expelling rebel Conservative MPs
- Chance of General Election rises sharply
- Why Blocking 'No Deal' is not a Ticket to Big Gains against the Euro and U.S. Dollar
Prime Minister Boris Johnson addressed the nation from the steps of 10 Downing Street on Monday, saying that he remains determined to deliver Brexit on October 31 and will under no circumstances be willing to go to Brussels with a request for another Brexit delay.
The message is a thinly-veiled warning from the PM that he will call an election if attempts by parliamentarians to outlaw a 'no deal' Brexit over coming days proves successful.
The events further stir the cocktail of uncertainty undermining Pound Sterling, and we expect this week to be a volatile one for the currency.
MPs will today return to the Commons from their summer recess and vote on whether to seize control of the Brexit process from the prime minister, and it is expected that 15 to 20 Conservative MPs could work with Labour and other opposition parties to seize control of the Commons agenda and pass an emergency law to stop Johnson from taking Britain out of the EU without a deal.
"If they do (vote for a delay), they will plainly chop the legs out from under the UK position and make any further negotiation absolutely impossible," Johnson said in a statement. "I don't want an election. You don't want an election. Let's get on with the people's agenda."
That Johnson warns he will not go to Brussels under any circumstances suggests strongly that he would respond by putting down a motion in parliament calling for an election.
There could therefore be vote on a General Election in the Houes of Commons as early as Wednesday, and the BBC's Political Editor Laura Kuenssberg says that if a 'remainers' succeed in legislating against a 'no deal' there would be a rapid election process, with October 14 set as the date for the vote.
Johnson's strategy puts pressure on remain-leaning MPs as it means were they to vote for a bill that effectively outlaws a 'no deal' Brexit, there would be no time to enact that legislation owing to the need for an election.
The decision will only add pressure on an already-fumbling British Pound: currencies tend to dislike major elections owing to the uncertainty they present, and an election being held before Brexit day on October 31 would certainly keep the Pound under pressure.
The Pound-to-Euro exchange rate is quoted at 1.1002, down over half a percent on the day.
The Pound-to-Dollar exchange rate is quoted at 1.2072, down 0.75%.
The stakes for Sterling are particularly high as there is a chance the current Conservative government might be replaced by a hard-left Labour government lead by Jeremy Corbyn.
One analyst tells us that the threat of a hard-left Labour government lead by socialist Jeremy Corbyn poses particularly elevated risks for the UK currency.
"A series of articles on the “Corbyn Revolution” at the weekend describes Corbyn’s plans for a transformation of UK policy to drive a reduction in inequality and a more or less comprehensive reversal of Thatcher reforms. Interesting to note that his first impulse is not to go after a “People’s QE” and the MMT rout, instead looking to actually fund his platform with new taxes. This opens up a downside path for Sterling even from these levels if Boris Johnson’s gambit to deliver Brexit and win the next election fails," says John J Hardy, Head of FX Strategy at Saxo Bank.
Above: Has Sterling's rally against the Euro peaked?
Political journalists have been reporting through the day that a snap General Election could be called as early as this week, and news of an emergency cabinet meeting taking place at 5PM has only encouraged speculation.
The Guardian's chief political correspondent reports "very strong rumours" that a General Election could be announced this week to take place before Britain leaves the European Union on October 31.
"Very strong rumours in Westminster today that election could be called this week - with verbal commitment of polling day pre-October 31," said The Guardian's Jessica Elgot.
Paul Brand, ITV's Political Correspondent, says a 'remainer' source has told him they expect expect Johnson to put down a dissolution motion (calling an election) with what appears to be a “reasonable” polling date before 31 October 31.
The Sun this afternoon reports Johnson is planning a snap General Election in five weeks time if he loses against rebel Remainers this week.
If he pushed a dissolution vote in the Commons on Wednesday, he could have a General Election as early as Thursday, October 10.
Labour Party leader Jeremy Corbyn said he would back an election if proposed by Johnson, and if the date of the vote falls before Brexit there is a good chance the requisite two-thirds majority of MPs would vote for an election.
The Pound tends to fall heading into a General Election as such votes tend to pose heightened uncertainty. Therefore, Sterling weakness could well be a feature of coming days and weeks on this factor alone.
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Betting markets had at the start of the day given odds of 4/9 (69% probability) that the date of the next General Election is 2019 according to Oddschecker, by this afternoon the odds had fallen to 2/7 (78% probability).
Corbyn has on Monday delivered a press conference, and told Sky News Labour will back a General Election under any circumstances if Boris Johnson were to call one:
“Of course, we are the opposition party, we want a general election”.
Purge of the Remainers
Above: File photo of Prime Minister Boris Johnson (C) Gov.UK
It has been confirmed Monday that Prime Minister Boris Johnson will remove the Conservative Whip from MPs who do not back him in a key Brexit vote on Tuesday.
Any Conservative rebels will also be barred from standing as Conservative candidates at the next election. The move is significant as it almost certainly means the PM loses his parliamentary majority, which in turn invites a no-confidence vote which the government would likely lose.
"Given his slim majority, such action would significantly raise the risk of a General Election. Price action in the GBP will be dominated by UK political news as parliament returns, with opponents to the Government looking to stop a “no-deal” Brexit at the end of October," says Robin Wilkin, a cross-asset strategist with Lloyds Bank.
Media reports suggest the move could see a host of former ministers who are looking to outlaw a 'no deal' Brexit including Philip Hammond, David Gauke, David Lidington, Margot James, Anne Milton, Rory Stewart and Sam Gyimah removed from the party.
"The whips are telling Conservative MPs a very simple message - if they fail to vote with the government on Tuesday they will be destroying the government’s negotiating position and handing control of Parliament to Jeremy Corbyn," a source from the Conservative's Whips office told The Telegraph. "Any Conservative MP who does this will have the whip withdrawn and will not stand as Conservative candidates in an election."
The government argue that there remains a chance of a deal being struck in October because the EU realises the Prime Minister is committed to leaving on October 31 'do or die', and those looking to take a 'no deal' off the table are undermining the Government's negotiating position.
"My strongest view remains that GBP has further to fall in order to catch up with recent political developments. The consensus view, I believe, has always been that ultimately a soft Brexit deal would be negotiated or better still a 2nd referendum would avert. The odds on this have shifted markedly in the past days and weeks and despite recent weakness I suspect the GBP needs to fall further," says Jonathan Pierce, on the sales and trading desk at Credit Suisse.
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Why Outlawing a 'No Deal' Brexit Won't Deliver Big Gains in Sterling
The British Pound has since mid-August recovered against the Euro, U.S. Dollar and a host of other major currencies, on a combination of developments that include signs the EU might be willing to rework some aspects of the existing Brexit deal.
Another source of support comes from the view that the UK parliament has the means and motive to effectively outlaw a 'no deal' Brexit from ever taking place.
There are signs that UK parliamentarians opposed to Brexit are hard at work on forging the legislation required to deliver such an outcome: and if markets sense they can achieve their aims then there is reason to expect further advances in Sterling.
However, we are of the firm belief that Sterling faces a 'no deal' paradox whereby removing 'no deal' from the equation is supportive on one hand, but on the other hand it is a poor outcome in that it limits scope for a reworked Brexit deal being struck.
Only a Brexit deal can unlock the conditions for a decisive and sustained recovery in Sterling, and we know this is exactly what Prime Minister Boris Johnson is striving to achieve.
"If legislation is passed this week that would rule out a no deal Brexit, the pound can be expected to rise. If it were decided that the Brexit deadline were to be extended but that the legal default position of the UK remained that a no deal Brexit could still take place at a future date, GBP may also rise, but by a lesser amount – since kicking the can down the road is not a solution," says Jane Foley, a foreign exchange strategist with Rabobank in London.
The Financial Times reports Johnson is to “step up the tempo” of talks in Brussels to secure a new Brexit deal, as he attempts to avert a defeat at the hands of Labour and pro-European Conservative rebel MPs at Westminster next week.
Johnson has apparently instructed his chief Brexit negotiator, David Frost, to meet his EU counterparts twice a week throughout September to hammer out a revised exit deal ahead of pivotal summit on October 17-18.
Johnson has made it clear in meetings with senior European leaders that his primary objective in any round of renegotiation is the removal of the Irish backstop clause, arguing alternative arrangements can be found that will ensure no 'hard' border is erected on the island of Ireland.
French President Emmanuel Macron and German Chancellor in August suggested they might be open to hearing what proposals Johnson has, thereby making a departure from the EU's previously steadfast message that the Withdrawal Agreement cannot be reopened, and the backstop cannot be removed.
From a currency perspective, we believe that the road to a materially stronger Pound lies with a reworked deal being secured with the EU that is then ratified by parliament.
Such an outcome delivers Brexit but also guards against any disruption that a 'no deal' Brexit might cause; it also stabilises the UK political environment and provides the much-needed certainty individuals and businesses require to boost investment.
This stability is what would unlock sustained gains in the Pound.
The efforts of remain-leaning MPs to enact legislation that outlaws a 'no deal' Brexit provides little uncertainty and presses the rewind button to the political landscape of Theresa May's final days in office.
Johnson knows that by keeping 'no deal' in play the odds of a reworked Brexit deal with the EU rise. He knows by shutting the door to other avenues, parliament will finally be left with only one route to avoiding a 'no deal' outcome: voting for a deal.
So from a Sterling perspective, yes MPs finding a route to blocking 'no deal' is supportive, but it is by no means a ticket to a sustained rally.
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