Never have the rules of parliamentary procedure been more pivotal to the near-term strategy of a currency, but such is the landscape for sterling traders with less than two months of the original Article 50 process left to run.
Tuesday’s (29 January) run of votes in the UK parliament – the failure of the Cooper amendment to extend Article 50 and the success of the Brady amendment pushing the government to seek “alternative arrangements” to the Northern Irish backstop – were probably the worst case scenario for sterling.
No extension keeps 29 March as a cliff-edge, while a commitment to renegotiate the backstop despite the European Union’s consistent refusal to amend the Withdrawal Agreement is the equivalent to the government continuing to commit to a belief in unicorns.
Typically, when I’m asked by clients, investors, journalists or others for a forecast on GBP/USD or EUR/GBP, the horizon is always twelve to eighteen months.
At the moment, you’re lucky to be accurate to within twelve to eighteen days. While nothing much changed on Tuesday, and sterling can’t be too unhappy with the outcome, all eyes must now refocus on the February 13-14 – the next ‘meaningful vote’.
Obviously, this will come with little more than six weeks until 29 March and leaves little time for renegotiation. As it stands, there is little to suggest that Prime Minister Theresa May’s deal is likely to garner the necessary support to pass the House of Commons in a few weeks’ time, so we must look at how the chips fall from there.
The sterling scenarios
The most negative stance for sterling would be the May government positioning itself for a ‘no deal’ upon defeat of the Withdrawal Agreement, although we find this unlikely. This circumstance is the only one in which we can see a no-confidence motion in the government succeeding as Tory MPs side with the Labour Party to bring the temple down on their heads to prevent a no-deal Brexit.
On the other hand, positivity could come as easily as a heckle to a disgruntled parliamentarian.
Of course, the most positive outcome would be a deal that provides the UK with a transitional arrangement and prevents the prospect of crashing out without an agreement. In this situation, we could expect sterling rise by as much as 5%.
The most important thing to remember though is that this week’s back and forth has eaten up time. We are still without a deal, leaving us to believe that sterling isn't going to be favoured ahead of the next meaningful vote.
The centre of gravity on GBPUSD is about 1.30, with GBPEUR about 1.13. We expect prices to hover around these marks in the short term. There is a significant chance in the near future that the equivalent of a political game of chicken forces weak hands to sign a deal, which will drive the pound ever lower.
Similarly, were the unthinkable to happen and the UK somehow conspires to throw itself over the cliff and onto the rocks without an agreement then the declines for sterling could be quite staggering. We would be looking for a GBPUSD rate of 1.15 in this circumstance.
Jeremy Thomson-Cook is Chief Economist and Head of Currency Strategy at WorldFirst.
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