British Pound vs Euro: PM May Faces Brexit Showdown in Parliament

-MPs to vote on 15 "Brexit-wrecking" amendments to EU Withdrawal Bill.

-Customs Union, Single Market membership, "meaningful vote" on table.

-De facto vote of confidence sees GBP/EUR braced for volatile session.

© Lee Goddard / Number 10 Downing Street

Pound Sterling may be tested on Tuesday as MPs gather in the House of Commons to vote on a series of “Brexit wrecking” amendments inserted into the EU Withdrawal Bill by the House of Lords, which will set the government's Brexit strategy in legislative stone.

If Prime Minister Theresa May loses the votes, which some reports have suggested she might, then the UK will be required by law to remain a member of the EU single market and customs union. The House of Commons will also gain the power to send May back to the negotiating table if MPs are not happy with the final deal negotiated by the government.

Such an outcome could reduce the prospect of a so called hard Brexit, where the UK leaves the EU in March 2019 without any arrangements for future trade in place, and boost Pound Sterling in the short term but it may also dramatically raise the prospect of a challenge to PM May’s leadership.

That latter consequence would heighten the risk of another general election being called and, according to some, raise the prospect of a Labour Party government which would also be a severely negative development for Pound Sterling.

"A full slate of defeated amendments could see EURGBP grind up toward resistance around 0.8965, but we are reluctant to chase a move higher. Correspondingly, if hopes for a softer Brexit platform were confirmed we could see a test of support around 0.8700, but we think a fresh catalyst would need to emerge to see a sustained push lower," says Jacqui Douglas, chief European macro strategist at TD Securities.

Douglas and the TD Securities team have told clients to "fade" any sharp moves in the Pound-to-Euro exchange rate Tuesday, as they are unlikely to be enough to force it out of the 1.11 to 1.15 trading range of the last nine months.

The Pound was quoted 0.14% lower at 1.3352 against the US Dollar during early trading Tuesday while the Pound-to-Euro rate was 0.06% lower at 1.1348.

"We estimate that GBP/USD is trading with a 2.5-3.0% discount at present – which is indicative of a 'muddling through' Brexit risk premium. This is unsurprising given the near-term focus on the Commons Withdrawal Bill vote and the 28-29 June EU leaders’ summit," says Viraj Patel, an FX strategist at ING Group. "We would expect this uncertainty premium to remain in the price of GBP until further clarity on the Brexit front."

PM May is also under growing pressure to present another plan for managing the Northern Irish border after Brexit, in time for the European Council summit on June 28. Failure to present something agreeable to EU leaders could mean trade talks are sidelined until the October summit that has always been seen as the final deadline for all agreements to be reached.

The final withdrawal deal, and anything agreed that covers the future relationship, will have to be ratified in all of the parliaments across the EU before the March 2019 Brexit date. This is a process that could take months and underlines the importance of resolving the key issues ahead of October.

"While a tricky summer of Brexit politics lies ahead, with May facing an impossible Brexit trinity, the pound still remains a good long-term value play. Our current forecasts continue to look for sterling to navigate towards levels consistent with a ‘neutral’ Brexit later this year (GBP/USD: 1.43 and EUR/GBP: 0.86)* – with the near-term balance of risks tilted towards GBP/USD moving back towards 1.36," Patel adds.

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