Political shenanigans in the UK parliament over Brexit have not only dragged the pound down to some of its lowest levels against major foreign exchange crosses since October 2016, but are also dragging the euro lower versus the dollar.
British members of parliament arrived back from their summer recess on Tuesday (3 September) to resume their tussle with Brexit supporting Prime Minister Boris Johnson, with all outcomes ranging from a no-deal Brexit to a Brexit delay, a change of government to a general election still possible.
(Source: Société Générale)
The resultant uncertainty of which is weighing on the pound. What’s more, data suggests GBP/USD and EUR/USD have recoupled in recent days making the twin crosses suffer. Kit Juckes, Head of Forex at Société Générale, said: “Brexit uncertainty is reaching new heights and is dragging both sterling and euro lower. The forex market’s “terrible twins” are sinking together.”
Juckes’ team still think that a 'no-deal' Brexit would take EUR/GBP to a high above 0.95 but below parity. “That won't help GBP/USD if it's achieved by dragging EUR/USD far below 1.10. We have a matter of days until the next ECB meeting, at which further easing is assured.”
Richard Falkenhäll, senior FX strategist at Nordic bank SEB, expects the pound to bear the brunt of whatever negativity unfolds. “The GBP will suffer and we expect new lows against the USD and the EUR in coming weeks, well below levels in early August 2019. The probability of a no-deal withdrawal has increased significantly since the former UK Prime Minister Theresa May resigned.”
Falkenhäll doubts the EU is prepared to change the withdrawal agreement at this point and remove the backstop on the Irish border. “Rather, the EU would try to deal with this issue in the political declaration. This makes the battle in the UK Parliament decisive for the Brexit outcome.”
