Comeback Kid: Pound Sterling Rallies Back Against Euro as Supreme Court Slide Proves Temporary

The British Pound has staged a strong comeback against the Euro as foreign exchange markets look to close out what has been a volatile day for the UK currency. 

The Pound to Euro exchange rate went as lowas 1.1557 at one stage in the wake of the UK Supreme Court's ruling that Parliament alone has the power to Trigger Article 50 of the Lisbon Treaty. 

The pair has since rallied back to 1.1645 at the time of writing.

The Euro to Pound Sterling exchange rate is meanwhile down to 0.8587 having been as high as 0.8651 at one stage.

The Pound's ability to stay afloat confirms that the Supreme Court ruling was widely expected by markets - we wrote as the Pound was falling that the selling was technical in nature and we were not convinced that GBP/EUR was en route to 2016 lows once more. 

Regarding the immediate outlook, the Pound has been hitting its head against important resistance against the Euro at around 1.1655 over recent days and it appears this level is not going to yield.

Analyst Robin Wilkin at Lloyds Bank says his bias is still for a move higher towards 1.1834-1.19 despite the heavy resistance seen at 1.1655.

Paresh Davdra, CEO at RationalFX agrees with the view that the near-term rally in the Pound has further to run.

"We expect the Pound to steadily climb back over the next few days," Davdra told Pound Sterling Live.

However, not everyone is convinced Sterling is likely to head higher against the Euro.

Analysts at Danske Bank say Sterling is likely to head lower over coming months and reiterate their view that the UK currency will likely test 2016 lows.

In a note following the ruling analysts at the bank say they still think the UK is heading towards a hard Brexit, as the UK cannot stay within the single market and get control over EU immigration at the same time.

"We still target EUR/GBP at 0.88 in 3M," says a note from Danske.

This equates to 1.1364 in GBP/EUR terms.

What Comes Next?

With Pound Sterling being a politically-driven currency, what matters going forward are the next developments on the Brexit front.

Note the argument made by analysts at BNP Paribas that the Brexit saga to settle down somewhat going forward, and this could allow Sterling a shot at recovery.

We now await the detail of the Government’s bill and planned timetable for this to be debated and voted on at the various stages in Parliament.

"Assuming the passage of the bill is relatively smooth through the House of Commons, one question will be whether it finds itself delayed as the Lords debate it. But even in the Common’s it seems likely that the bill will be subject to amendments; reports are that Labour, the Liberal Democrats and the Scottish National party have prepared a swath of amendments," says Victoria Clarke at Investec.

We have however heard, following the ruling, that the Lib Dems will oppose the triggering of Article 50 outright unless the Government delivers a second EU referendum.

Meanwhile, Labour party leader Jeremy Corbyn has indicated that he will demand a plan from the government to ensure it is accountable to Parliament throughout the Brexit negotiations, but it does not appear that Labour will be looking for overarching changes to the draft legislation.

"Overall, whilst the Government’s timetable is tight, an end-March trigger point for Article 50 does still look to be a workable timeline," says Clarke.

Political Hurdles

Though the Supreme Court unanimously rejected the Scottish government’s attempt to be formally consulted on the triggering of article 50, the Scottish National Party has set itself on a collision course with the Westminster government over Brexit.

With the Labour Party calling for amendments and the Lib Dems pledging to vote against article 50, it’s clear that the government faces a rocky road ahead.

“Piloting such a controversial piece of legislation through parliament was always going to be tricky – but in the face of such determined resistance from the opposition benches, it will be a Herculean task," says David Lamb, Head of Dealing at FEXCO Corporate Payments.

As a result, Lamb believes Sterling is to endure another week of yo-yoing fortunes.

"The confirmation of the markets’ predictions brought only fleeting relief before uncertainty over the future course of article 50 returned with a vengeance. The gains made by the Pound on Monday were quickly eroded as sterling returned to its familiar pattern of ‘two steps forward, three steps back." says Lamb.

The Pound moved notably higher when the High Court first ruled last year that Parliament would have a say in the process of triggering Article 50.

Back then markets felt that Parliament would ‘soften’ Brexit were it to have more of a say.

We warned that expect the same reaction, were the court to rule against the Government’s appeal, would be wrong this time around.

The landscape is different now - not only is the Government well prepared to put a Bill before Parliament on triggering Article 50 - i.e it's already in the price - but Prime Minister May has gone one step further by allowing Parliament a vote on the final deal.

Markets want clarity, and were Article 50 to not be triggered in March, as planned, then uncertainty could weigh on Sterling.

Analyst Oliver Harvey at Deutsche Bank is also of this view believing that anything that compromises the Government's Brexit plan could justify a short-lived correction in the Pound.

All analysts we have heard from are in agreement that if there are to be moves in the currency, it will come down to the finer details.

“Given GBP’s notable rally since PM May’s ‘Clean Brexit’ speech last week (+3.0% vs USD and +2.0% vs EUR), we suspect that a ruling in favour of allowing Parliament to vote on the triggering of Article 50 is already in the price. It’s what follows – in terms of the government’s legislative actions – that will matter for GBP’s overall reaction,” says Viraj Patel at ING in London.