Sterling steadies after Queen agrees Prorogation

GBPEUR

Sterling steadies after Queen agrees Prorogation. In yesterday’s post we covered the breaking news that the government planned to suspend parliament. This happened quicker than many thought, with the Queen agreeing to prorogue parliament. Sterling fell by around 0.7% against the Euro and US Dollar However, it didn’t fall as much as many thought it would. Let’s look at why.

Why didn’t prorogation cause Pound fall further?

Many thought that Sterling would continue falling. There are 2 reasons that the losses were limited.

Firstly, not much has really changed since yesterday. Despite all the headlines of a ‘constitutional outrage’, the situation remains largely the same. Parliament would not have been sitting anyway for much of the time due to party conferences.

Typically in September/October parliament goes into recess for around 20 days for party conferences. The shutdown of parliament is therefore only adding 3 days to this regular shutdown. It does limit the time MP’s have to try and pass legislation to avoid a No Deal Brexit, but only by 3 days. Prorogation is something that usually happens every year, but it largely goes unnoticed. It could be argued that given MPs have been debating this issue for 3 years, what could have been achieved in these extra 3 days would have been questionable.

The other reason the Pound didn’t tumble further is the simple fact that Sterling is already oversold. The Pound is cheap and attractive to investors. It has already been heavily sold in recent months so that also limited the losses for the Pound.

Will the Pound go up or down?

The answer to this questions hasn’t changed, and it all depends how the markets view the chances of a ‘No Deal’ Brexit. If Boris can agree a deal with the EU in October, then the Pound is likely to surge in value. MP’s could manage to pass legislation to avoid a No Deal Brexit, and this could also cause the Pound to rise. However, their plans to do this could result in the EU refusing to make concessions. Their attempts to avoid a no deal could actually have the opposite effect.

The legal default, passed in legislation by MPs, is that the UK will leave the EU at the end of October. If there is no deal agreed, and no extension offered, then the only other result would be a No Deal brexit. This would almost certainly send Sterling crashing to 10 year lows against the Euro and 36 year lows against the US Dollar.

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