Pound Sterling "on Edge" Heading into Mid-week's Crunch Brexit Bill Debate

- Another high-risk parliamentary vote faces Theresa May

- Defeat for government likely a short-term negative for the Pound say MUFG

- Pound-to-Euro rate @ 1.1382, Pound-to-Dollar @ 1.3186

Image © Photocreo Bednarek, Adobe Stock

Pound Sterling could remain an under-performer into the mid-week period as domestic political risks remain a focus for foreign exchange markets.

The UK government's flagship Brexit bill - The European Union (Withdrawal) Bill - is back for debate at the House of Commons on Wednesday, after the House of Lords failed to rubber-stamp the bill and ensure for Sterling uncertainty remains rife. The return of the bill to the elected chamber of Parliament presents yet another danger-point for the Prime Minister who continues to struggle to unify her party around the government's official position regarding Brexit.

Peers in the upper chamber sent the bill back to the House of Commons, demanding legislators include amendments that allow for MPs to vote on how the government should proceed if there is no Brexit deal by 21 January 2019.

Peers backed the amendment to the EU Withdrawal Bill by 354 to 235, a majority of 119.

There were 22 Conservative rebels who voted in favour of the amendment, including Tory former deputy prime minister Lord Heseltine and Conservative former ministers Lord Patten of Barnes, Lord Willetts and Baroness Warsi.

The bill will now go before the House of Commons again and the government must either negotiate changes to the bill - that accounts for their stance and the stance of the Lords - or send the bill back to the Lords in its current format in a rebuke to the demands of the unelected body.

Clearly, there is political risk involved for May and her government should she fail to get her way with suggestions that the government could ultimately fall if there is a failure to pass the legislation.

"UK PM May risks another defeat with potentially big political consequences," says Piet Lammens, an analyst with KBC Markets in Brussels.

For foreign exchange markets the issue is important as it poses continued political uncertainty; something Pound Sterling despises; the Pound-to-Euro exchange rate is seen trading at 1.14, having been as high as 1.1455 earlier this week.

The Pound-to-Dollar exchange rate is seen at 1.3184, having been as high as 1.3272.

"Speculators who are long sterling may be in for additional pain as the clock ticks towards Wednesday's Brexit showdown in the House of Commons. If PM May fails to dig out a compromise with Tory pro-EU rebel MPs within the next 32 hours and loses the mid-week vote it could spur further GBP losses on fears the UK government might collapse," says Robert Howard on the currencies desk at Thomson Reuters.

May has said she is taking on board the concerns of critics of the bill, but she also argues the legislation must not restrict her freedom in the exit talks. Indeed, if the government's hands are tied by parliament, should Brussels not instead be negotiating with parliament who could soon be the ultimate arbiters of the bill?

"The amendment will now be brought before the House of Commons again, on Wednesday, where the government risks defeat in a battle to the last vote, due to a number of rebels among Tory ranks," says Luca Mezzomo, Head of Macroeconomic Analysis with the bank Intesa Sanpaolo.

"The chances of negotiations being successfully closed by the European Council on 18-19 October now seem very slim indeed," adds Mezzomo.

Lee Hardman, a Currency Analyst at MUFG warns his clients there is a real risk that the government could be defeated when the proposed amendment is voted on in the Commons on Wednesday.

"A defeat for the government would likely be seen as a short-term negative for the Pound as it would raise concerns over the stability of the government," says Hardman.

On the other hand, there might be some positives for the currency.

"If the proposed amendment is passed, it further highlights that parliamentary pressure will remain in place to reduce the risk of a more disorderly 'No Deal' Brexit which ultimately could provide support for the Pound," says Hardman.

We believe this positive scenario will only be applicable should the current government and Prime Minister remain intact , therefore Wednesday should be an intriguing day for Sterling.

Ladbroke's puts odds of PM May not lasting until the end of June 2018 at 5/1, and 3/1 for Brexit Minister David Davis to be the next cabinet minister to leave.

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