Good morning,
Groundhog week
How many times have I written that the last week was not a good one for the pound? Too many to remember and, unless you spent the last week living under a rock, you will have seen the pound once again taken lower by political pressures.
Unfortunately sterling is going to remain driven by headlines one way or another until some certainty is eventually found.
However, over the weekend it became clear that there will be more hurdles and headlines to come, each with their own individual effect on sterling. Next week I’ll host a webinar where I’ll run through a few of the most important ones that we think may appear in the coming 4 months. You can register for free here.
Conservative party call confidence vote against Theresa May
A confidence vote that has been lurking in the shadows for what seems like 6 months is expected to be triggered in the coming few days, and possibly as soon as tomorrow. To be honest, it has to come soon or the European Research Group of Tory Brexiteers look more and more like the kid at school who keeps promising he’ll get his big brother on you. May has already faced down bluffs from the ‘Remain’ side of her party and it now seems likely that she will call the ERG’s hand.
We think it almost certain that sterling would fall on the calling of such a contest. For our money, we think she walks such a confidence vote and sterling rebounds with further losses if she does fall and a leadership contest results.
Parliament vote down Theresa May’s Brexit plan
This is the main risk that we see for sterling between now and the end of the year. You do not need to be a political genius or a maths whizz to work out that with Labour and other opposition parties standing against, the government does not have the votes to pass the deal. Depending on your Brexit ideology that could lead to anything from a no-deal scenario to an election or even a second referendum.
So, what’s most likely? A no-deal scenario is the frontrunner, purely as a result of the ticking clock and the fact that it is now the destination at the end of the path of least resistance. An election would only come if the government lost a no-confidence vote in itself, something that requires two-thirds of MPs to vote for it – Theresa May definitely has the numbers to negotiate such a contest.
Parliament voting down the deal will bring back memories of the 2008 vote in the US for the Troubled Asset Relief Program (or TARP for short). The vote failed initially with stock markets collapsing, dollar liquidity drying up and oil falling by its second-largest daily drop ever.
So far, other than the weeks following the vote, sterling has remained weak but hasn’t seen historic moves on the back of political intransigence. A defeat of the bill and the country being left with maybe only 3 months to negotiate a deal would be another chance for markets to express their profound displeasure. Falls of 5-10% in the pound would not be out of the question.
Sterling is the barometer of Brexit sentiment and such a move may be enough to focus a few lawmakers’ minds to come to an equitable arrangement.
An election is called and fought
We think that this is a low probability event given the lock on the five-year term that the Fixed Term Parliaments Act has lumbered us with. For us, there is only one way that could see the Labour party take the keys of No.10 from the Conservatives and that is them publicly backing a second referendum or People’s Vote. Such a move would initially boost sterling, although reticence over a Corbyn government would likely keep the exuberance under wraps eventually.
A deal is passed
This is still our base case scenario and a no-deal scenario remains a low probability outcome at the end of the day. We may have to go through a parliamentary defeat or two before we get there and, as we have laid out above, sterling may enjoy that as much as a trip to the dentist but the political will on both sides of the Channel is there to get something across the line by the end of March.
For now, we will wait on Westminster to outline which direction of travel it wants to take and which of the above signposts it wishes to pass and avoid.
Have a great week.