Pound-to-Dollar Rate Eyes Further Gains Amid Brexit Votes in Parliament 

© Pavel Ignatov, Adobe Stock

- GBP to make further gains agains USD says ING, Commerzbank.

- As parliament seeks to wrestle control over Brexit from government.

- But beware of misplaced optimism, and the many pitfalls in road ahead.

The Pound-to-Dollar rate could extend its nascent run of gains over the coming days, according to analysts at ING Group and Commerzbank, as parliament wrestles with the government for control over the nation's path toward Brexit. 

MPs will debate and vote on a series of amendments to the EU Withdrawal Act on Tuesday 29, January which are aimed at giving Brexit opponents within parliament more control over what the government does next, following parliament's mid-month decision to reject Prime Minister Theresa May's Withdrawal Agreement.

This is a significant moment for the government and Pound Sterling because two of the amendments due for debate will either attempt to force the government into requesting an extension of the Article 50 exit period if it has not managed to pass its Withdrawal Agreement through parliament by the end of February, or push the government into holding a second referendum.

Both amendments will have the effect of pushing back the data at which the UK is set to depart the European Union and could potentially lead the nation's exit from the political and economic union to be halted altogether. If passed, they would certainly make a dreaded "no deal Brexit" much less likely, by preventing the UK leaving without any kind of deal whatsoever come March 29.

"Tuesday is shaping up for a huge day for GBP, where PM May will re-submit her Withdrawal agreement tomorrow (likely rejected) and then parliament gets to vote on the Cooper amendment –which could lay out a path for a Brexit delay until year-end. There’s enough here to keep GBP supported for the time being and for Cable to push [up] to the 1.3260/3300 area," says Chris Turner, head of currency strategy at ING Group. 

Above: Pound-to-Dollar rate shown at 4-hour intervals.

Most economists say a no deal exit, where the UK defaults to trading with the EU on World Trade Organization terms, would be bad for the economy. Some say it would push the Pound-to-Dollar rate down as far as 1.20. 

This is why the prospect of such a thing being made impossible by parliament has proven to be such a boon for the Pound, which is the G10 league table's best performing currency for the 2019 year-to-date. The Pound-to-Dollar rate is now up 3.4% for 2019.

"GBP/USD last week eroded its initial target of the 200 day moving average at 1.3061. While underpinned by the near term uptrend, today at 1.2921, it stays bid and we look for gains to the 55 week ma at 1.3297," says Karen Jones, head of technical analysis at Commerzbank. 

Jones says Pound Sterling could also attempt to challenge its October high against the Dollar over the coming days, which is located at 1.3363, but warns this level could easily survive an initial test by the market.

Over the medium-term though, she and the Commerzbank team say technical factors could see the exchange rate rise as far as 1.3650, which coincides with the 200-week moving average of closing prices.

"We note the 13 count on the 240 minute chart and will attempt to buy the dip. A rise above the July, September and October highs at 1.3258/1.3363 would put the June high at 1.3473 on the cards," Jones says, in a note to clients Monday. 

Above: Pound-to-Dollar rate shown at daily intervals.

The House of Commons rejected May's Withdrawal Agreement in a landslide vote on January 15, which saw 432 of the House's 650 MPs vote against it. Just 202 members of parliament voted in favour of the deal, so the PM needs more than 100 additional votes to see it pass on the next reading. 

The Sun reported last week that the Democratic Unionist (DUP) Party have agreed to support Theresa May's EU exit proposal in its next parliamentary vote if the contentious "Northern Irish backstop" is made time-limited. 

However, the Northern Irish kingmakers in parliament can offer the Prime Minister only 10 votes so their support is not enough on its own to secure the legislation's safe passage through parliament. 

Furthermore, any extension to the Article 50 period being sought by opponents of Brexit in parliament would require the unanimous approval of the remaining members of the European Union, and there's no guarantee they'd grant it. 

From the EU's perspective, the idea would be pointless unless there's a credible prospect that such a thing would eventually see the Withdrawal Agreement ratified, or lead to a potentially Brexit-cancelling second referendum or general election.

However, there's no majority in parliament or among the electorate for a second referendum, while the governing Conservative Party could easily be booted from office if Prime Minister Theresa May was to hold another election. 

"The strong rise in the value of the pound over the past week or so suggests that investors have already gone a long way to pricing out the risk of a ‘no deal’ Brexit.  Legislation now needs to follow suit.  If it does not, the pound will be very exposed to the downside," warns Jane Foley, a strategist at Rabobank.

May and Pound Sterling need consensus and a parliamentary majority, but the opposition and some members of the May's own Conservative Party say her plan will put too much distance between the UK and EU.

Meanwhile, supporters of Brexit in both the Conservative Party and wider country say it will deliver nothing more than an exit in name only. Some also say it would lead to a situation that is even worse than that. 

This underlines perfectly the extent of division in the British political establishment over Brexit, while highlighting the threat posed to the Pound by potentially misplaced optimism among traders that the exit process can be either slowed or stopped altogether.

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