Market Event

Attorney General Unwinds Sterling Gains

Michael Baker, Thursday, 14 March 2019

Tuesday saw the first of potentially 3 votes, in what Is seen as the final throw of the dice. As we approach the final furlong of the Brexit process the UK parliament will seek to clarify how they wish to proceed with the withdrawal process. With the UK still set to legally exit the European Union on the 29th March 2019, PM Mays deal was again overwhelmingly rejected. The options left on the table include negotiating an extension or revoking of Article 50, an option now looking more likely. Proceeding with the schedule date of departure but without an agreement on trade and relations is still a possibility, although one which is undesirable for both the UK and the EU.

Back in January the government had its first chance to vote on PM Mays withdrawal deal, an agreement that had been ratified and approved by all 27 member states. With the house voting 432-202 against the deal, the PM suffered one of worst defeats in modern history. A clear stumbling block is the issue of the Irish backstop, a mechanism to keep the UK closely aligned to EU customs rules if an agreement cannot be reached by the end of the transition period. What seems to have caused the biggest controversy is that Northern Ireland will be subject to extra rules, meaning extra checks on goods passing between Northern Ireland and the rest of the UK. Some see this regulatory difference as an attempt to break up the United Kingdom, but the EU are adamant it’s to protect the Good Friday Agreement, ensuring no hard border in the north. The 1998 ‘Good Friday Agreement’ is a key driver of peace between Ireland and Northern Ireland, a conflict that has seen decades of violence and instability. A major part of the agreement removed any cross-border checks between Ireland and the UK, effectively enforcing an invisible border. With the UK leaving the EU this border comes under threat as it will be the only land division between the 2. Whilst both the UK and Ireland maintain that in whatever circumstance they will honour the good Friday agreement, questions on how economies can exchange goods and services without a trade agreement does pose the possibility of potential checks.

In the recent round of talks a last-minute dash to Strasbourg by the UK PM and her negotiating team ended with a late-night announcement which lit up on every news wire ‘PM secures Legally binding changes to withdrawal deal’. A significant development as back on the 29th January, parliament agreed (317 yes votes to 301) that if the PM could secure a better deal on the Irish Backstop then they would approve the deal and the UK would enter a transition period where future relations can be negotiated. A legally binding agreement means that the UK could unilaterally exit the backstop agreement without the need to seek the EU approval. Sterling took this announcement at face value and we saw a 2.5% increase on Monday. Any positivity was short lived as shortly before 11am yesterday the Attorney General released a document that there were no significant differences in the latest amendments secured by the PM and legal risks remained. Shortly after this announcement the ERG (European Research Group) and the DUP (Democratic Ulster Party) announced they will not be supporting the Government in meaningful vote 2, sterling went into freefall and gave back earlier gains. Hopes of passing the vote were dashed long before it took place, the outcome saw another heavy defeat by a majority of 149 (Yes: 242 No:391).

Where does this leave us now? Tonight, we see the government vote on whether they should take no deal off the table. Back in 2017 the Government overwhelmingly voted to trigger article 50 by a majority of 384 votes (Yes: 494 No:114), this set a date of 29th March 2019 to agree an orderly withdrawal with a no-deal the default option if an agreement cannot be reached. Tonight’s vote looks to force the government to pursue all options that avoids a no deal, this will be followed by tomorrows vote on extending article 50. The only options available to avoid a no deal are to agree a deal or to extend/revoke article 50. An extension/revoking of article 50 will require approval by the 27 heads of EU states, its likely they will agree to more time but only if it’s to prepare for a no deal, ratify the withdrawal agreement or if the UK pursues another referendum/election.

Where does this leave sterling traders? Sterling has seen a brief rally since the vote last night as the likelihood of extending article 50 boosts the chances of eliminating the no-deal scenario. 2019 highs of 1.335 sit in a strong resistance zone and possible this area will remain capped until we get a clear signal that a deal is likely. Back on the 26th Feb we broke through a strong trend resistance which has held since last April, this led to a push up to the 2019 highs and break above a multi month resistance zone between 1.3257/3301. We have seen a sustained hold above the 200-day SMA (simple moving average) with a brief drop below the trend line. A touch of the 200-day SMA on the 8/11th March attracted support which leaves us finely balanced and at the mercy of the next Brexit headline.

GBPUSD Daily Chart, Shows the recent breakout to the upside overcoming previous strong resistance and holding above the 200-day SMA (red line). Recent moves down retest the trend line which briefly breaks but finds support at the 200-day SMA.

GBPUSD post vote

Source: ETX Capital

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