The British pound bounced higher on Monday on the back of the news that the U.K.’s Labour Party would support a second Brexit referendum, demonstrating once again that political developments around the split are the only factor driving the currency for now.
In fact, only a moderate outcome is price in, traders say. A “moderate” outcome comes in form of a soft Brexit, in which the U.K. leaves the European Union with a deal governing trade and movement of people.
Other scenarios, for example a hard Brexit, in which Britain crashes out of the EU, or no Brexit could lead the pound
to slump or rally, respectively. A hard Brexit could even see the euro-sterling pair
run from £0.8677 on Monday to parity, said Jane Foley, senior FX strategist at Rabobank.
The roller coaster ride is neatly shown in this Nomura chart, using the euro-sterling pair, which could improve to £0.80-£0.82 per euro in the best case.
At this point — as for most of the time Brexit has been negotiated — all options are on the table and no consensus on a deal has been reached even though there are less than five weeks left until March 29, when the U.K. will no longer be a member of the EU.
“The chances of delaying Brexit are increasing day by day, with a recent report in the Telegraph indicating that May is considering delaying the process for up to two months, As long as the U.K. doesn’t crash out of the EU without a deal, the pound is likely to continue holding near $1.30s in the near term,” said Hussein Sayed, chief market strategist at FXTM.
Sterling last bought $1.3132, compared with $1.3097 late Monday in New York.
“It’s not clear that an extension of article 50 is a positive for the pound if just for two months, but sterling volatility would be hit hard as front end vols would sell off with the hard Brexit date being shifted from 29 March to whenever that extension may be,’ said Nomura FX strategist Jordan Rochester.
In the most recent developments, the Labour Party said it would support or bring a parliamentary amendment to propose a second Brexit referendum, while Prime Minister Theresa May postponed the vote on her Brexit deal to March 12 — just seventeen days before the deadline.
On top of that, both Conservative and Labor lawmakers have broken away from their parties to for the 11 man-strong Independent Group, which favors staying in the EU.
But the idea of giving the vote back to the public in a second referendum begs the question whether there would be enough time ahead of the deadline and what would happen if the outcome was the same.
The next amendment Parliament is due to discuss is brought by Labour MP Yvette Cooper, which proposes that if no deal has been agreed by mid-March, May would have to allow a hard Brexit or get an extension of article 50. Market participants expect that sterling should benefit if Cooper’s amendment gets supported, as the market will read it as a go-ahead for an extension.
“If the Cooper amendment passes next week, the market will assume a hard Brexit is off the table sterling is set to rally,” said Foley. “That said, the size of any rally is likely to be limited by the fact that the market consensus is already well positioned for a soft Brexit and by fear that the U.K. economy is already slowing.”
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