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Pound Gains as May Wins Cabinet Backing on Draft Brexit Deal

ForexNov 14, 2018 17:00
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© Reuters. Pound Gains as May Wins Cabinet Backing on Draft Brexit Deal

(Bloomberg) -- The pound edged higher after the U.K. Cabinet approved a draft Brexit plan, removing a key hurdle to finalize a divorce deal with the European Union.

Sterling struggled to rally even after Prime Minister Theresa May said an impassioned debate led to backing from her top ministers at a lengthy meeting on Wednesday. Brexit negotiators secured a deal on paper in Brussels Tuesday, yet the currency has fluctuated on worries that lawmakers could reject the agreement.

The currency has slumped about 13 percent against the dollar since the U.K. voted to leave the EU in 2016 and has since fluctuated on the twists and turns of the negotiations. Failure to get a deal or Parliament backing this year could see a slump toward $1.20, while approval by lawmakers could drive a rally toward $1.40, according to strategists.

“It took her more than five hours to get agreement from her Cabinet, but there are increasing murmurings of a leadership challenge,” said Jeremy Stretch, head of Group-of-10 currency strategy at Canadian Imperial Bank of Commerce, adding investors appeared to “buy the rumor, sell the fact” after the announcement. Stretch said getting Parliament’s approval would be difficult and he would prefer to sell any rally toward $1.3075.

The pound gained 0.4 percent to $1.3029, after earlier falling to a low of $1.2882.

With just over four months to go before the Brexit deadline, the agreement marks a significant step toward a two-year transition period and trade talks, relieving some of the uncertainty for companies including the banks and investment firms that crowd London’s historic financial center.

Strategists see a sustained rally being conditional on the Brexit text being approved in Parliament. A majority of lawmakers must vote in favor for the deal to pass, and May faces opposition from both within her own Conservative party and the opposition Labour. Anger among Conservatives is “so high” that a call for a confidence vote in May is possible, BBC editor Laura Kuenssberg said on Twitter, citing an unidentified member of the party.

If the deal is voted down when it goes to Parliament, it could lead to the U.K. having to return to the negotiating table, holding a general election or even a second referendum. The vote could be a “real knife-edge affair,” said Stretch.

Here’s what strategists and fund managers said after May’s statement:

Allianz (DE:ALVG) Global Investors

  • Allianz Global Investors is keeping its long position on the pound after May said she had the backing from her Cabinet, said money manager Kacper Brzezniak
  • “We hear a lot of noise from a lot of people, but in the end, I don’t think there is any support for no deal,” said Brzezniak
    • “If the deal gets done, GBP rallies a lot”

Danske Bank

  • “It’s difficult for the pound to strengthen much as there is still too much uncertainty,” said analyst Mikael Olai Milhoj
  • “It depends on the vote in the Commons and until we know whether it can pass or not, the pound will remain volatile”
    • Sees EUR/GBP moving down to 0.84 if it passes
  • The coming days will be very important as “the big game changer is when we get clarification on whether the deal can survive in the House of Commons or not”

Deutsche Bank (DE:DBKGn)

  • Though markets want clarity on cabinet resignations, pound trading may end the day on a positive note near $1.30, says Alan Ruskin, global co-head of foreign-exchange research
  • The market “is also sending a message of continued concerns about getting this ratified in parliament”
  • Without fresh negative news, levels near $1.30 are sustainable, Ruskin says

(Updates throughout.)

Pound Gains as May Wins Cabinet Backing on Draft Brexit Deal

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