Pound Sterling Weakens at Start of Critical Week for Brexit, Tightens Range vs. Euro and Dollar in Anticipation of Breakout

Above: File image of Boris Johnson. © Gov.uk

- Pound-to-Euro exchange rate @ 1.1213, down 0.14% on the day.

- Pound-to-Dollar exchange rate @ 1.2328, up 0.06% on the day.

- Johnson prevails in Scottish court appeal against the Benn Act.

- Sets stage for Supreme Court clash ahead of October 19 deadline.

- Johnson warns Macron of mistake in keeping UK in EU after Oct. 31

The British Pound starts the new softer, but within the confines of a tight range against the Euro and U.S. Dollar, as traders take money off the table ahead of what is expected to be a critical week for Brexit developments.

We expect markets to digest the latest news that suggests Prime Minister Boris Johnson will indeed take the UK out of the EU "come what may" on October 31, an outcome that could well wrong-foot markets that are expecting an extension to be agreed at the October 17-18 meeting of the EU Council.

Johnson has launched legal action in an attempt to ensure Brexit takes place if the EU and UK are unable to reach agreement. He prevailed in Scotland's Outer House Court of Session Monday in securing a ruling that effectively invalidates the so-called Benn Act, which requires him to seek an extension of the Article 50 period if he doesn't secure a withdrawal agreement by October 19.

Several Government sources have told The Daily Telegraph that Johnson is willing to go all the way to the Supreme Court in an effort to avoid having to write a letter asking for a delay to Brexit. Currently, the Prime Minister is bound by the Benn Act to request a Brexit delay if a deal has not been secured by October 19. But Monday's ruling could now give way to another battle in the Supreme Court.

Expect further such speculative headlines to come through, all designed to sow doubt amongst EU capitals and 'remainer' MPs as to whether a 'no deal' Brexit can in fact be prevented. Like a coiling spring awaiting a trigger, Sterling is trading within increasingly tight ranges against the Dollar and Euro. A deal would unlock a sizeable move higher we believe, but if it becomes clear Johnson will succeed in delivering a 'no deal' Brexit, then a sizeable move lower is possible.

Above: Sterling's increasingly tight ranges - above shows GBP/USD - indicates a market awaiting a big news event.

Those with foreign exchange payments should know the risks going forward are two-way in nature and from a risk management perspective locking in current rates for at least part of a money transfer is advised. The GBP/EUR is quoted at 1.1160 with independent providers, but is towards 1.10-1.0930 at high-street banks.

The GBP/USD is quoted at 1.2250 with independent specialists, but at 1.2070-1.1990 with the banks. 

Johnson will this week commence a diplomatic offensive to try and get EU leaders to back his latest set of proposals aimed at securing a deal. 

Ahead of this week's planned visits to European capitals, Johnson has apparently told French President Emmanuel Macron this is the "final opportunity" to strike a deal, further reinforcing the narrative that the UK is leaving the EU on October 31, come what may.

A Downing Street source told The Times that Johnson told Macron that the EU "should not be lured into the mistaken belief that the UK will stay in the EU after October 31... we have to push forward."

"The prime minister said that this is the final opportunity to secure a deal... but if this is to be possible, the EU must match the compromises that the UK has made in recent weeks and months," reports The Times.

Macron is meanwhile reported to have told Johnson that the EU will "evaluate at the end of this week whether a deal is possible that respects European Union principles".

Macron has also apparently urged EU leaders to "match the compromise" the UK has made, which signals to us that there is potential for progress. 

Indeed, UK Brexit Secretary Stephen Barclay told the BBC that the UK proposal was its offer for "the broad landing zone", suggesting some flexibility, particularly over the issue of consent of the Northern Ireland Assembly. The proposals by the UK give the Northern Ireland assembly in Stormont the power to exit the EU's single market, should they so wish, in the future.

To the EU and Ireland this appears to be offering up too much power to the Assembly that ultimately takes the future of the Northern Ireland border out of the EU & Ireland's hands. "Boris is getting push back on his plans to have a customs border on the island of Ireland. Plenty of European leaders have said that it's a non-starter, but everyone seems to be up for a negotiation," says Mark Palmer at Hamilton Court FX.

Time to move your money? Get 3-5% more currency than your bank would offer by using the services of a specialist foreign exchange specialist. A payments provider can deliver you an exchange rate closer to the real market rate than your bank would, thereby saving you substantial quantities of currency. Find out more here.

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"A Cacophony of Mixed Messages"

How Johnson plans on circumventing the Benn Act in the event of a failure to reach a deal remains the big mystery at play. According to government papers submitted to a Scottish court last Friday, Johnson will abide by the law and send a letter to the European Union asking for a Brexit delay if no divorce deal has been agreed by October 19.

However, in response to the court submission, Number 10 was quick to clarify that while they would abide by the law, they would not be asking for a Brexit delay.

The contradictions here could certainly explain why Sterling is trading a tight, narrow range against the majors: there is simply no concrete information to drive a directional move.

"A cacophony of mixed messages," says Neil Wilson at Markets.com. "On the one hand the government says it will comply with the Benn bill but on the other it will still seek to leave on Oct 31st without a deal if one is not agreed. The EU has all but rejected the deal on the table. Pricing for this has become a nightmare for traders - expect more volatility. Many may feel it safer to stay on the side lines."

While Johnson is preparing to meet his European counterparts, we believe lower-level technical talks will continue behind the scenes.

We know the proposals put forward by the UK last week form the basis of further conversations, with both sides of the table keen to keep talking.

If talks can continue up until the October 17-18 EU Council summit then we believe enough has been done to allow for a breakthrough to be announced, with the summit seeing EU leaders 'OK' a new agreement. Of course, this would represent the passing of the first phase for a deal, the second phase involves pushing it through a divided and sceptical parliament. We would expect Sterling to trade a tight range until it becomes clear parliament will in fact pass any new deal.

If talks breakdown over coming days, the Summit becomes a discussion on another Brexit extension, and the focus will fall back on Johnson's efforts to leave without a Brexit deal. This would clearly represent a negative scenario for Sterling and expect the currency to break to the downside.

"We regard a new delay combined with a general election in November as the most likely outcome. Based on current polls, Boris Johnson and the Conservatives would likely win an election, given support from the Brexit Party. Hence, we believe the risk of a no-deal Brexit has shifted from end-October this year to end-January 2020," says Magne Østnor, an economist at DNB Bank.

Hence, we are entering a critical period for Brexit, and Sterling.

Time to move your money? Get 3-5% more currency than your bank would offer by using the services of a specialist foreign exchange specialist. A payments provider can deliver you an exchange rate closer to the real market rate than your bank would, thereby saving you substantial quantities of currency. Find out more here.

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