Sterling banks gains despite ‘convoluted’ Brexit process
Sterling held most its gains against the euro and the dollar yesterday even as analysts saw the dangers of UK prime minster’s Boris Johnson’s new Brexit deal becoming ensnared in the Commons.
The UK currency benefited from the fading risks that Mr Johnson can now pull the UK out of the EU without a deal anytime soon but was held back by the potential for the Brexit deal failing to get the approval of MPs.
“The fear for markets is that we are moving into a position where the process to pass this Brexit deal is going to be more and more convoluted,” said Joshua Mahony, chief market analyst at online broker IG.
The UK economy continues to suffer with each month that passes without clarity, and unfortunately today’s decision appears to increase the likeliness that the October 31 deadline is missed as it opens up the possibility of a host of amendments seeking to block a clear yes-no vote on this recent UK-EU deal
The rise of sterling and the receding chances of a damaging crash-out Brexit helped boost Irish shares for a second week. AIB and Bank of Ireland rose 4.3% and 2.6%, while ICG, the Irish Ferries firm, rose 1.2%.
Paul Dales, chief UK economist at Capital Economics, said that currency and stock- market traders are trying to figure out the political event at Westminster that would signal a further move in sterling.
The Ftse-100 index comprises many overseas firms whose earnings benefit when sterling falls, while the constituents on the wider Ftse-250 tend to prosper when the UK currency gains.
“The comparatively poor performance of the Ftse-100 since 10th October is a reaction to the rebound in sterling since Boris Johnson agreed a new Brexit deal with other EU leaders rather than a reflection of scepticism about its passage through the UK’s parliament,” Capital Economics said.
If the deal does pass this week, which remains far from certain, the benchmark equity index will probably continue to struggle as sterling gains more ground. However, in this case, small-cap and domestically- focussed equities in the UK may thrive, as they have done already this past week,” it said.
The consultancy sees about a 50% chance of a deal being approved some time, a 25% chance of a delay beyond next January, and ascribes “a 20% chance of a no-deal at some point and a 5% chance of no Brexit at all”.
Sterling traded above $1.30 for the first time since May on speculation Mr Johnson may win parliamentary backing for his Brexit deal this week. Against the euro, it traded at 85.96p.
With the parliamentary vote likely to be decided by fine margins, sterling failed to build on gains after breaching $1.30. The UK prime minister needs to garner support of 61 MPs to back his deal. He likely has 62, according to a Bloomberg analysis.
“The price action today suggests that the FX [foreign exchange] investors are fairly comfortable holding on to their pound positions, notwithstanding the lingering political uncertainty in the UK,” said Valentin Marinov, head of Group-of-10 strategy at Credit Agricole.
“This could point at further pound resilience on the back of abating concerns about a no-deal Brexit and or hopes for a Brexit deal,” he said. “Even if there is a positive outcome for the government, then the next set of risks are the actual amendments,” said Petr Krpata, chief currency strategist at ING Bank.
