Pound Sterling Firms vs. Euro & Dollar as Govt. Softens Stance on IMB

- GBP recovery intact
- Govt. softens stance on contentious Bill
- Goldman Sachs says GBP looking attractive at current levels

Picture by Andrew Parsons / No 10 Downing Street

• GBP/EUR spot: 1.0996 | GBP/USD spot: 1.2944
• GBP/EUR bank rates: 1.0788 | GBP/USD bank rates: 1.2682
• GBP/EUR specialist rates: 1.0897 | GBP/USD specialist rates: 1.2828
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The British Pound has traded higher against the majority its peers over the course of the past 24 hours as it recovers from heavily-sold conditions and is boosted by news that Prime Minister Boris Johnson has agreed to amend the Internal Markets Bill (IMB).

Johnson has agreed to give MPs a vote before the Government uses the powers in it that would override elements of the UK-EU Withdrawal Agreement.

The move could prevent a potential rebellion amongst Conservative MPs when the IMB returns to Parliament next week, but from a foreign exchange markets perspective the observation is that it could calm tensions with the EU.

The government has agreed to table an amendment to the Bill which allows Parliament a vote on whether the Government can exercise the powers to "disapply" aspects of the legally-binding Withdrawal Agreement could be invoked.

"The Internal Market Bill was designed to give MPs and peers a vote on the use of these powers via statutory instrument," said MP Damian Green, an architect of the compromise, following the agremeent. "It is agreed that the Parliamentary procedure suggested by some colleagues provides a clearer, more explicit democratic mandate for the use of these powers, and also provides more legal certainty."

While the contentious element of the law does still stand, the provision of a Parliamentary lock could provide the EU with the cover needed to continue working towards a Brexit trade deal.

"Theoretically, the EU could break off the trade talks. It won't," says David M. Herszenhorn, chief Brussels correspondent at POLITICO. "If Johnson wants to torpedo the process, he will have to do so on his own. The EU negotiator, Michel Barnier, will work to the last minute to find agreement on all the issues, knowing neither the EU heads of state and government nor the European Parliament would ever approve the deal without an accompanying commitment by the U.K. to uphold the Withdrawal Agreement in full."

The Pound rose by a percent against the Euro and Dollar when news of compromise was first reported, the gains mean the Pound-to-Euro exchange rate is close to retaking 1.10.

The Pound-to-Dollar exchange rate went back above 1.30 at one stage on Thursday but has since pared those advances in the face of a Dollar revival in the wake of Wednesday night's FOMC event.

The Pound-to-Australian Dollar exchange rate has meanwhile completed three successive days of advances and is back at 1.7777.

"The Pound has rallied on reports that the government is close to an accommodation with potential rebel MPs over the Internal Markets Bill. If the rebels can be appeased then the chances of getting back to negotiations with the EU increase, Barnier et al being keen to avoid being the ones to walk out," says Chris Beauchamp, Chief Market Analyst at IG.

The Pound fell sharply last week when the contentious elements of the IMB were announced, leading the EU to threaten the UK with unspecified sanctions unless the UK withdrew them.

"The UK government introduced an Internal Market Bill, with a stated intention of protecting the integrity of UK-wide economic activity in the event that talks with the EU over a free trade agreement break down. However, the legislation violates aspects of the Brexit Withdrawal Agreement - an international treaty signed in January - and therefore has reopened the prospect of a more disorderly exit," says Zach Pandl, an analyst at Goldman Sachs.

The response of the EU to moves by the UK government to soften the offending Bill could set the tone for Sterling ahead of the weekend, but initial reactions suggest the EU will maintain a cool approach.

According to RTE Europe Editor Tony Connelly, EU Chief Negotiator Michel Barnier told told EU ambassadors that legal action against the UK remains on the table, but will be used only at the "appropriate time".

Despite EU consternation, the 'nuclear' threat to abandon talks unless the UK drops the IMB therefore looks to be off the table, serving as a reminder to markets that selling Sterling too agressively could ultimately fail to pay off.

"During a briefing this morning it's understood EU ambassadors registered "cold fury" at Boris Johnson's move to overwrite the NI Protocol. However the message was to continue with the trade negotiations, and to separate the work of the Joint Committee (on the Withdrawal Agreement) & trade talks," says Connelly.

The EU and UK will meanwhile in all likelihood reach agreement on the flashpoint concerning the UK's ability to export food into the EU. The EU will need to add the UK to their list of approved third countries before the UK can export food, something that the UK says shows the EU can theoretically block the export of food from the rest of the UK to Northern Ireland.

"A dispute over when both sides will list the other in terms of food imports, is seen in the EU as being used by Downing Street as cover to allege that the EU was threatening a food blockade of Northern Ireland," says Connelly.

It appears that this dispute is one that boils down to technicalities and strategy, as the UK does fully meet existing EU requirements given it is a member of the EU.

A report out yesterday said the UK will present the necessary details to the EU within a matter of weeks, which would aid progress towards a trade deal finally being sealed.

"Outsized moves in GBP (last) week have injected a sizeable risk premium in GBP. It's now trading at a decent discount on our short-term valuation, underscoring that some of the recent Brexit news has already been priced in. At the very least, this backdrop suggests that in the coming weeks GBP would benefit more from good news rather than sink further on bad news. We still expect more volatility but risk/reward favours taking profit at these levels," says Mark McCormick, Global Head of FX Strategy at TD Securities.

TD Securities had initiated a sell on the Pound against the Canadian Dollar on September 08, in anticipation of Brexit sentiment deteriorating and Sterling falling as a result. The call appears to have paid off handsomely given the pair fell 2.69% last week alone.

Goldman Sachs analysts have set targets for EUR/GBP of 0.87 for our base case "deal" scenario, and 1.00 for a disorderly "no deal" exit. (EUR/GBP at 0.87 = 1.15 GBP/EUR).

"Based on those estimates, the market is currently pricing a 40-45% chance of the "no deal" outcome," says Pandl. "But beyond the very short-term we would see meaningfully lower odds of a "no deal" Brexit than the market appears to be implying—the outcome would be damaging to the UK economy, and the Johnson government has used similar negotiating tactics before. For investors willing to look through some near-term volatility, current levels for Sterling longs now look attractive, in our view."