What Can Possibly Go Wrong for Sterling?

Marcus Ashworth

(Bloomberg Opinion) -- Currency traders spy an impending Brexit breakthrough, even through the fog of Prime Minister Boris Johnson’s tricky attempt to get his deal through the British parliament.

The danger of the U.K. crashing out of the European Union without a deal is being priced out increasingly by the markets, helped by the majority of lawmakers blocking even the faintest risk of that unhappy outcome. The pound broke through the $1.30 level at one point on Monday, and with the “no deal” threat receding there are fewer obvious reasons for it to weaken substantially.

Sterling has rallied 7% in seven days of trading. So there might be some reversal if Parliament keeps thwarting Johnson. If this was a done deal the pound would be well above $1.30. As always with a currency pair, not all of the recent rally is simply pound strength; some of it is dollar weakness.

But if Johnson doesn’t get things all his own way this week (after the House of Commons speaker John Bercow quashed his attempt at a vote on Monday), the case for long-term pound bulls remains decent. The parliamentary numbers are looking good for Johnson’s deal. Even if it fails, are the alternatives that bad? 

The opposition Labour Party might try to amend his bill to include a customs union with the EU. That wouldn’t necessarily be a terrible outcome for the British economy, and hence the pound. Similarly, a second referendum would be a chance to reverse the whole Brexit episode — again something that could be positive for the economy. Another period of uncertainty might subdue the market optimists for a while, but over time they’d recover.

Anyway, such attempts by opposition lawmakers to “amend to death” Johnson’s deal would almost certainly push the prime minister to end his attempt to pass his bill. Then we’d be looking probably at a new general election, one that Johnson is well-placed to win. That would have the double advantage of getting a fresh mandate for his Brexit deal, and keeping the hard-left Labour leader Jeremy Corbyn out of Downing Street.

Unexpected events are always lurking, of course, as we’ve seen so often in the three-year Brexit saga. There’s even the unlikely, though not impossible, chance of Johnson being arrested if the Scottish courts deem that he broke the law by not sending a proper request to the EU to extend the Brexit process. Parliament had passed this demand into law, but Johnson only sent an unsigned letter fulfilling his legal obligation, and another signed one saying that he didn’t think an extension was necessary.

Corbyn’s Labour might also stymie Johnson’s attempts to force through an election should his deal not make it through Parliament. 

The worst that can be said, though, is that a further delay to Brexit and uncertainty about an election or another referendum will be a short-term hold on sterling. Unless there’s an unexpected disaster in the process and no deal happens by accident, the bulls are in the ascendant.

To contact the author of this story: Marcus Ashworth at mashworth4@bloomberg.net

To contact the editor responsible for this story: James Boxell at jboxell@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Marcus Ashworth is a Bloomberg Opinion columnist covering European markets. He spent three decades in the banking industry, most recently as chief markets strategist at Haitong Securities in London.

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