British Pound on the Defensive as Johnson's "Final Offer" Gets Frosty Reception in Brussels, Volatility Ahead
Above: UK Prime Minister Johnson and European Council President Tusk. Tusk's reaction to leaked Brexit plans could be key for Sterling. Image Copyright: European Union
- Sterling on defensive after latest Irish border proposals.
- Johnson sticks to deal-or-no-deal guns, says offer is final.
- EU poised to reject latest ideas aimed at replacing 'backstop'.
- Election and Art 50 extension are increasingly likely, some say.
- Nomura sells EUR/GBP, sees Art 50 extension and EUR weakness.
The Pound was on the defensive Wednesday as Prime Minister Boris Johnson's latest Brexit proposals were reportedly criticised in Brussels and after the Conservative Party leader told grassroots supporters that the plan was a "final offer" that must now be met with compromise from the EU.
Prime Minister Johnson told the party faithful Wednesday that proposals made to European capitals earlier this week are a "final offer" from the UK and that the EU must now compromise on its own demand that the 'integrity of the single market' not be threatened by any exit agreement with the UK. The implication is the UK could now more likely be headed for either a divisive and damaging Article 50 extension that faciliates a risky general election, or a 'no deal' Brexit that would clobber the Pound.
The open border on the island of Ireland that's required by the Good Friday Agreement would amount to a backdoor into both the EU and UK single markets in the absence of matching regulatory regimes, although some in the 'leave' camp insist that such threats can be addressed with technology and adapted versions of systems that are already in place. But the EU has rejected all of the proposals put to it so far and the clock is now ticking down to October 31 and the expiry of the current Article 50 extension period.
"We doubt PM Johnson can reach a deal with the EU that can win over a majority of MPs in the fragmented UK House of Commons. If Johnson can’t reach a Brexit deal by 19 October, the Brexit date will likely be delayed from 31 October 2019 to 31 January 2020 and early general elections would probably take in place in November. While the risk of a hard‑Brexit end‑October is low, it cannot be ruled‑out and this remains an important drag for GBP," says Elias Haddad, a strategist at Commonwealth Bank of Australia.
In a heavily Brexit-focused speech to the Conservative Party conference Wednesday, the Prime Minister claimed that voters have more sway over the outcome of so-called reality television programs than they do the actions of the current parliament, which he accused of wanting neither Brexit, an election nor to do anything else "constructive". But most notably for markets, Johnson stuck to his guns that the UK will leave the EU on October 31 "with or without a deal", despite parliament legislating against that.
Some in the market have quietly feared that Johnson has a trick up his sleave that will enable the government to circumvent the so-called Benn Act, which the Prime Minister referred to as simply a "bill" on Wednesday. The act of law made in parliament last month, with the aid of a partisan Speaker of the House of Commons and 21 now-former Conservative MPs, requires Johnson to seek an extension to Article 50 by October 19 if he hasn't secured a deal with the EU.
Above: Pound-to-Euro rate shown at hourly intervals.
"A final observation is that the deterioration in public discourse both from MPs and the Prime Minister has undermined prospects of any deal being ratified, should one be reached with the EU27. Levels of trust between the government and opposition MPs are at all time lows," says Oliver Harvey, a strategist at Deutsche Bank. "If no agreement can be reached, however, then Brexit will revert to a constitutional battle between the UK [government] and Parliament. Our base case remains a caretaker government is formed, followed by an extension to Article 50 to facilitate new elections."
There was uproar at the time of the "Benn Act' passing because of the manner in which it came about, with the Speaker of the House of Commons casting aside constitutional convention by handing control of the parliamentary agenda to the opposition and MPs who were rebelling against a government that's supposed to control Commons business except in certain prescribed circumstances. The act passed is said to have a number of 'loopholes' in it, which a determined government might be able to exploit.
"GBP/USD again sold off yesterday following its recent failure at the mid-July high at 1.2580 and we suspect the market has topped here, and is likely to remain on the defensive. Minor support is found at the 61.8% retracement at 1.2196. Further minor support sits between the early and mid-August lows at 1.2080/15 and major support lies at the 1.1958 current September low," says Karen Jones, head of technical analysis at Commerzbank.
Midweek sees the Pound-to-Euro exchange rate trading at 1.1245, down from the week's high at 1.1304, while the Pound-to-Dollar exchange rate was at 1.2290 on Wednesday and down from an earlier 1.2344.
Above: Pound-to-Dollar rate shown at daily intervals.
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EU Poised to Reject Border Proposals, but GBP/EUR Draws Buyer
The European Union is poised to reject Boris Johnson's reportedly final proposals on managing the Northern Irish border after Brexit, according to a report from Reuters, with one official said to have described the plan put forward on Tuesday as "fundamentally flawed".
The Telegraph, which first received and reported on leaked documents detailing the offer, says the UK intends to propose two borders for four years with one in the Irish Sea between Great Britain and Northern Ireland. There will also be customs checks between Northern Ireland and the Republic of Ireland.
"I want to make clear we are not long GBP/USD. We continue to expect risk off and USD strength to apply and are short EUR/USD and AUD/USD. Both working very well indeed. But we are short EUR/GBP as hope is a powerful thing, the ECB is in a clear easing cycle and at some point rebel MPs should get their act together and art.50 will be extended (as the government can’t wriggle out of it)," says Jordan Rochester, a strategist at Nomura.
Above: Pound-to-Euro rate shown at daily intervals alongside EUR/GBP rate (blue line, left axis).
In a boost for Johnson, the Democratic Unionist Party - key allies of the Conservatives - is largely "content" with the details of Johnson’s plan. This suggests that if the plan were put before Parliament, it might have a shot at passing. It's apparently already been presented to major European capitals, but the EU's reaction reduces the probability of an agreement and according to some, means a general election is more likely before any Brexit.
"The massive gulf between the UK and the EU on the Irish backstop mean chances of a revised deal this month are slim. Failure to get an agreement approved by MPs would oblige the UK prime minister to ask Brussels for more time. The way Boris Johnson tackles this deadline, and the way an extension is viewed by voters, will be key in a late-2019 election," says James Smith at ING.
The danger for the Pound is that even with a potentially Brexit-nullifying election looming, fears of a 'no deal' Brexit could well start rising again, putting downward pressure on Sterling. This is because, with Johnson declaring this week's offer final and the EU rejecting it, the PM and Conservatives could now give up on looking for a deal and begin focusing their energy on securing an explicit electoral mandate for a 'no deal' Brexit.
A committment to 'no deal' by the Conservatives could see the Brexit Party step aside, enabling the 'leave vote' to fall in line behind the Conservatives.
Those looking to transact out of Sterling should consider locking in current rates with a specialist provider: at present we are seeing the best international payment rates on GBP/EUR at around 1.1165 and 1.22 on GBP/USD.
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