British Pound Maintains Momentum as Commons Pass European Union Withdrawal Bill

Positive price action in Pound Sterling comes after the House of Commons voted through the European Union Withdrawal Bill at its second reading. 

The Pound edged higher against its G10 counterparts Tuesday morning as traders positioned for the release of the latest round of inflation figures from the UK.

The morning's price action comes closely on the heels of a key development in the UK's slow march toward the European exit door.

Sentiment towards Sterling lifted on news the UK Government has succeeded in passing the EU Withdrawal Bill by 326 votes to 290.

There were fears the Government might lose the vote, had a number of Conservative Party members rebelled against the Government.

The bill, which will end the supremacy of EU law in the UK, now moves onto its next parliamentary stage.

Indeed, the bill will now face more attempts to change it with Conservative MPs believed to have tabled new amendments.

Nevertheless, the victory confirms the Government is functioning and Prime Minister Theresa May has the backing of her party. May needs to hold on to the reins of Government as five years without elections of any kind - and the instability they pose - would likely afford Sterling space to grow.

The vote goes some way in providing the kind of stability markets are looking for and could explain some of the positivity being seen in Sterling this morning.

“The Pound’s recent rebound has continued overnight after it avoided another banana skin as the EU repeal bill won its first House of Commons vote,” says Lee Hardman at MUFG.

The bill enables the body of existing EU laws to be immediately incorporated into UK law, which will ensure continuity of the status quo in the immediate aftermath of Brexit. Currencies like continuity and stability; the bill goes some way in providing this.

The Pound-to-Euro exchange rate up 0.15% for bids and offers to be accepted around the 1.1027 in London Tuesday morning, the highest level seen by the pair since the middle of August.

This makes for a Euro-to-Pound exchange rate of around 0.9068. The Pound-to-Dollar rate rose 0.30% to be quoted at 1.3209 during the first hour of trading, taking its year to date gain across the 7% threshold.

August price data will be released by the Office for National Statistics at 09:30 London time Tuesday.

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Pound-Euro Parity Fears 'Shelved for Now'

Headline consumer price growth is seen rising by 20 basis points to 2.8% for the month, according to the consensus forecast of economists, while core consumer prices are seen rising by 10 basis points to 2.5%.

“This is not likely to change the stance of the BoE. The MPC will be back to full strength Thursday with the arrival of Sir David Ramsden. We expect him to vote for no change and the other members to repeat their August votes, resulting in a 7-2 vote,” says Guy Stear, an economist at Societe Generale.

The morning’s inflation data will be among the final inputs into the September interest rate decision of the Bank of England, due Thursday.

Average earnings figures slated for release on Wednesday will also be key to the Bank's evolving expectations for economic growth.

Economists and strategists expect no change in rates for September but a sizeable minority are flagging the risk of a hawkish turn on the MPC as a source of upside potential for the Pound over the coming days.

“Inflationary pressures from renewed GBP weakness may, for some MPC members, tilt the growth-inflation policy trade-off in favour of an earlier than anticipated reversal of the post-Brexit emergency monetary stimulus," says Viraj Patel, a strategist at ING Group.

A hawkish hold refers to a shift in the vote split where one more of the nine man MPC votes for a hike instead of another hold. This would bring the vote count to 6-0-3 and could mean the market begins to price and interest rate hike from the Bank of England sooner rather than later.

“We are now starting to see the risk premium related overshoot in EUR/GBP unwind; a hawkish hold at this week's BoE meeting could fuel a further correction towards - and potentially below - the 0.90 level, which would almost certainly shelve any EUR/GBP 'parity' fears for now,” says Patel.