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British Pound Hit by Surprise E.U. Withdrawal Bill Developments

- EU withdrawal bill back before commons on Tuesday, June 12

- Only one day to debate 15 amendments and 200 concessions

- Sends clear message that Government unwilling to accept plans to soften Brexit by the Lords

British pound impacted by political jitters

© Photocreo Bednarek, Adobe Stock

The general rule-of-thumb goes like this: The 'softer' the Brexit anticipated by the markets, the better the outlook for Sterling becomes, the 'harder' the Brexit that is anticipated, the worse the outlook Sterling.

It would appear there is an element of 'harder Brexit' being factored in by Markets on Monday, June 4 following news that the UK government appears determined to bulldoze aside proposed amendments to its flagship piece of Brexit legislation - the EU Withdrawl Bill.

News broke mid-afternoon June 4 that the Bill returns to the Commons on Tuesday, June 12 and we note the Pound turned lower at around the time the news was made available suggesting to us currency markets are seeing a building up of politically-tinged risks on the near-term horizon.

What has caught commentators and markets by surprise that only one day has been granted to debate the 15 amendments and +- 200 concessions made by the government during the course of the Bill's passage. We note a flurry of negative responses from ardent remain-supporting media figures, commentators and politicians which suggests they are of the opinion that the moves by the House of Lords to massage Brexit in their direction are likely to be binned and the government and ruling party will maintain a tight grip on the process.

"The government will attempt to overturn amendments from the House of Lords including on the customs union. The votes will be seen as an important test of the government’s ability to pass their Brexit plans later this year. Brexit uncertainty is set to be a weight on the pound this month," says Lee Hardman, Currency Analyst with MUFG.

At the time of writing Sterling is clearly the worst-performing major currency which suggests immediately that domestic factors are weighing; and with the day's only economic data having proven to have been positive, the blame must fall on political uncertainty. The Pound-to-Euro exchange rate is quoted at 1.1384, down 0.5% on the day, while the Pound-to-Dollar exchange rate is quoted at 1.3305, down 0.36% on the day.

Pound is day's worst performing currency

Julian Smith MP - Chief Whip and Parliamentary Secretary to the Secretary - told Conservative party MPs that he looks "forward to working with you to deliver back to the House of Lords the European Union (Withdrawal) Bull in a way that reflects both the referendum result and the Conservative party manifesto we all stood on last year".

In short, the amendments by the unelected House of Lords, will likely not be accepted by Parliament if the Conservatives and DUP vote with their whips.

Recall the Government suffered as series of defeats ahead of the recess by the Lords who sent back recommendations to the House of Commons that would ultimately water-down the type of Brexit the UK would enter into.

Sterling could therefore be lower on the view that the soft-Brexit House of Lords amendments are likely to be rejected.

Sterling could also be lower as any defeats on this Bill caused by rebel Conservative MPs could sink Theresa May's government, and therefore markets will be wary that the UK is heading into a period of heightened political uncertainty.

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Risks Increasing

Prime Minister Theresa May has reportedly also decided to postpone the release of the government's white paper on the future relationship with the EU until after the EU summit set for June 28-29.

While this is not positive for the negotiations, it is not a big surprise either, as the UK and not least the Cabinet are still much divided on what the future relationship (especially with respect to customs) should look like.

"The problem is that the next summit is in October, where the risk is that the UK and EU27 will need to agree on everything," says Mikael Olai Milhøj, Senior Analyst with Danske Bank.

Elsewhere, UK companies expressed their concerns regarding ongoing uncertainty and the future trading relationship in a meeting held with Theresa May yesterday.

The EU's chief negotiator, Michel Barnier, meanwhile maintains that much is at stake if the two sides cannot reach an agreement on how to resolve the Irish border issue by the end of the month.

"It remains our base case that the two sides will reach an agreement eventually but it may be much closer to the deadline before it happens and risks are increasing as time goes by," says Milhøj.

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