London: Brexit will return as the dominant driver for the pound this week as Parliament debates UK Prime Minister Theresa May’s divorce deal.
Sterling lost over 5 per cent in 2018 as fears of a hard exit from the European Union grew, and the currency’s direction this year will depend on whether lawmakers will be able to avoid the UK crashing out of the bloc on March 29. Parliament will debate the withdrawal deal from Jan. 9 and vote on it the following week, with investors watching if May can appease hostile lawmakers.
“Brexit headlines that have been largely absent over the Christmas period should stage a return and dominate the price action in the pound in coming days,” Credit Agricole SA strategists including Valentin Marinov wrote in a note. Though lawmakers may choose May’s “imperfect deal” rather than no deal, the chances of trying to reopen negotiations with the EU or even delaying the March 29 exit cannot be ruled out, they said.
The pound largely held its ground above $1.26 over the Christmas period, apart from a “flash-crash” dip to a 20-month low driven by the yen on Thursday. Following market turbulence earlier in December when opposition to the withdrawal agreement led to ministerial resignations and a failed leadership challenge against May, any signals of support could allow for some recovery in sterling, said Thu Lan Nguyen, strategist at Commerzbank AG.
“It would only be surprising if MPs do indicate next week that they might support May’s deal after all, in which case the pound has significant recovery potential,” said Nguyen, adding this could drive it as high as $1.31.
Failure to approve the deal opens up potential outcomes including a no-confidence vote in May, another referendum or even an election. Mizuho Bank Ltd’s head of hedge-fund currency sales Neil Jones favours remaining short on the pound until the Brexit deadline, and would only cover that short position if there’s a big sell-off to around $1.10.
“The widest possible range of Brexit scenarios should keep the pound on a downtrend,” Jones said.