Pound steadies as May wins confidence vote; what next for Sterling?

GBPEUR

Good morning. After a tumultuous week for UK politics, Theresa May has won the vote of confidence, and the currency markets have settled down somewhat. Sterling hasn’t surged on the result, but has steadied a little from the lows we saw earlier this week. GBP/EUR is at 1.1140 and GBPUSD is just below $1.26.

In terms of Brexit negotiations, nothing much has changed, apart from the fact the Brexiteers will not now have as much sway as they once did. May is back in Brussels but they are adamant that they won’t budge or make any further concessions, and that’s why the Pound has failed to re cover its recent losses.

Will Sterling go up or down in January 2019?

If you look at the way the EU tend to negotiate, with their recent Canada trade deal for example, they tend to leave things to the last minute before making the necessary concessions to get a deal through. I think that’s what we’ll see in January.

The withdrawal agreement in it’s current form will not pass through parliament. If however they can add some legal text committing to a free trade deal, and some way for the UK to exit the backstop should that not happen, then it’s likely it will be voted through. In this scenario the UK and EU would then enter trade negotiations likely to last at least 2 years. If all of this happens in January, then I think it’s likely Sterling will recover significantly. However I can’t see how the Pound would recover from it’s current levels until January.

What if the EU don’t budge, how would the Pound react?

If the EU dig their heels in and refuse to make any concessions, then I can only see a No Deal Brexit. There is talk of a second referendum, but I can’t see how that would work in practice. Offering 3 choices of leaving with a deal, without, or remaining, then that would simply split the leave vote which wouldn’t be acceptable. If there was another binary choice, then all the polls suggest it will be just as close as last time. So if either Leave or Remain won by small margin, what then? A third referendum? A fourth?

In this scenario it’s likely that the Pound would drop significantly. So while some progress was made this week in terms of UK political uncertainty, the broad picture of Brexit uncertainty remains unchanged.

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