Pound Sterling "Could Edge Higher", EU Yet to Reject UK's Final Brexit Offer
Above: Boris Johnson. © Pound Sterling Live
- Sterling steady on Thursday, markets await next catalysts
- EU yet to reject UK's latest Brexit plans
- EU ready to delay Brexit in defiance of Johnson
The British Pound remains relatively well supported against its major competitors on Thursday, October 03 with foreign exchange markets opting to watch the currency from the sidelines as they try to gauge whether the UK's final Brexit proposals to the EU will be accepted.
Sterling is trading within increasingly confined ranges, a sign that traders are unwilling to take sizeable directional bets on the currency noting that risks for a move either higher or lower are large.
On the one hand, an all out rejection of the UK's latest 'take it or leave it' Brexit proposals would be negative for Sterling; however the currency still has downside protection in the form of a Parliamentary Act that effectively outlaws a 'no deal' Brexit from occurring on October 31.
On the other hand, the striking of a deal would be an all-out positive for the currency and we would expect a sizeable rally should one be struck. Those looking to bet against Sterling would be wary of the risks of doing so under such circumstances, and markets will await further clarity on the direction of Brexit before engaging in fresh trades we believe.
The Pound-to-Euro exchange rate is quoted at 1.1228, with the week's low at 1.1189 and the high at 1.1320.
The Pound-to-Dollar exchange rate is quoted at 1.2303, the week's low is at 1.2207 and the high at 1.2344.
"The underlying tone has improved and GBP could edge higher," says Quek Ser Leang, an analyst with UOB Bank, "the prospect for sustained decline below 1.2205 is not high."
Prime Minister Johnson on Wednesday sent his Government’s final proposals that would leave Northern Ireland in the European single market for goods, but leave the customs union - resulting in new customs checks amidst a "two border" approach.
"PM BoJo handed down his ultimatum to the EU: New Deal or No Deal. He is proposing some kind of techno jiggery-pokery over where customs checks would be located away from the Irish border, and that there would therefore be effectively two borders for four years post-Brexit. From the EU side, the view is still that there should be no borders, ever. Can we find compromise in days between a technicals-based and a principles-based proposal," says Michael Every, a Senior Strategist with Rabobank.
.@michaelgove says he’s 99% sure Boris Johnson will get a deal when answering an audience question from @The_Backbench in our live stream ad break. #Peston pic.twitter.com/y47xZIr1v2
— Peston (@itvpeston) October 2, 2019
Johnson on Wednesday told grassroots supporters in his conference speech that the plan was a "final offer" that must now be met with compromise from the EU.
The stakes for Sterling are high.
"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.
Those with international payment requirements who are nervous of a deterioration in the outlook for Sterling could attempt to lock in part of their exposure now to protect against any downside. We note independent FX providers - who offer more beneficial rates than banks do - are offering GBP/EUR at 1.1160, while GBP/USD is being offered at 1.2230.
There has yet to be a major official response from EU leaders on Johnson's proposals, and this suggests to us that they have not been rejected outright.
Hence, why Sterling is seen treading water in anticipation.
"If Brussels can be persuaded to support the initiative it appears that PM Johnson might be able to garner enough support in Parliament to back it as well, suggesting that this is probably the closest the two side might come to finally reaching a deal," says Timothy Fox, Head of Research & Chief Economist at Emirates NBD.
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Typically the EU would be expected to brief against any proposals that they are not comfortable with, and despite some grumblings, the relative lack of guidance will offer Johnson some confidence that something workable has been offered.
Ireland's Prime Minister Leo Varadkar said the proposals did not "fully meet the agreed objectives" of the original guarantee against a hard border on the island of Ireland, but it is notable he did not reject them entirely.
Jean-Claude Juncker, president of the European Commission, said that among "positive advances" there were "problematic points", including how the arrangements would be policed. To us it sounds as though further negotiations can hammer out a plan.
Further downside protection for Sterling will come from news out on Thursday that the EU could grant another Brexit delay even if the letter making a request for an extension beyond October 31 is not signed by the prime minister.
Such a move would narrow Johnson's scope to deliver on a pledge to leave the EU on October 31 "come what may", a commitment he repeated once more in his conference speech.
"A meagre knee-jerk uptick in GBP was noted as the Times reported that the EU might grant a Brexit delay even if PM Johnson fails to request one," says a note from Eurex Exchange.
European leaders are reported to be on standby to hold an emergency Brexit summit in the last week of the month if Johnson fails to get a new withdrawal agreement past the House of Commons in the next two weeks.
EU figures believe that were Johnson to fail to get a deal, and subsequently refuses to ask for an extension, another member of the Government could instead make the request.
This would likely be a senior civil servant.
A source told The Times that the extension letter could be sent by Sir Mark Sedwill, the cabinet secretary, or Sir Tim Barrow, the UK’s ambassador to the EU, should the prime minister refuse to sign or send it.
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