Rollercoaster crash for May’s deal

13 March, 2019

Tom Arnold

Yesterday was a critical day in the unfolding Brexit story, and as a result, we had a rollercoaster of a day on the currency markets. It started with news overnight that Theresa May and Jean Claude Juncker had agreed legally binding assertions in the form of a new “joint instrument”, designed to help limit the binding nature of the Northern Irish Backstop. This seemed to give Parliament what it had demanded in terms of “legal assurances”, and the Pound rallied significantly overnight, with news wires increasing confident that maybe the ERG, DUP and the majority of May-Deal-hating MPs could be persuaded to vote for the new deal.

However, speculation started to mount that the legal assurances weren’t sufficient, and in fact, little had changed, and the absence of any kind of statement from Attorney General Geoffrey Cox began to weigh on the Pound. Then came the reality check, and the Attorney General’s legal advice was published and there it was in black and white – “the risk that the UK might be trapped in the backstop against its wishes remains unchanged”. He did say that the legal assurances, reduced the risk, but that there was still no unilateral mechanism for the UK to limit the backstop once it was triggered. With support for Theresa May’s deal suddenly in tatters again, the Pound dropped by around 1.5% against both the Euro and the Dollar.

The Prime Minister, despite obvious illness, then came to Parliament and gave a statement backing her deal, and with some Tory dissenters coming out and saying they would now back the deal we saw the Pound claw back a little ground. Tempered though by the DUP saying they would vote against the deal and the ERG advising its members to do likewise…

So, to the vote, and as was widely anticipated, the PM’s deal lost and lost big, with a majority of 149 MPs deciding that her deal was not the best option. The next steps have been predetermined for a while now, with a vote today on taking “No Deal” off the table and a vote tomorrow calling for an extension to the Article 50 period. Both motions are expected to pass, with the main point of contention being how long the extension will be – three or four months seems to be the preferred length, but there are European Parliament elections in the summer, and if we extend beyond them then we would need to participate in those elections. Hence a longer term would be almost inevitable, with suggestions maybe a further two years might be the best bet to provide scope for any and all options – referendum, election, renegotiation etc…

The Pound has taken the result of last night’s vote fairly well and come up by around 0.5% this morning, and the relative stability of an extension and No Deal being taken off the table, is quite Sterling positive, BUT, this is all dependant on the motion this evening being passed. Any hint of No Deal is an option in 16 days’ time, and the Pound is in serious trouble – recent analysis has suggested in a No Deal scenario the Pound would drop 10-15% immediately, before then continuing a downward spiral with rates below parity becoming the “norm”. So tonight is all important, potentially more so than yesterday.

With the Pound only a cent off the best rates seen for almost two years against the Euro, and with this potentially epic banana skin this evening, today could be the perfect time to secure your currency and remove the risk entirely. Why not give your CI consultant a call to discuss your options and to run through the mechanisms we have to protect you from market volatility.


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