In what has been one of the most volatile and unpredictable weeks for sterling exchange rates since the EU referendum almost 2 1/2 years ago, the pound now faces more uncertainty in the final stages of Brexit. Sterling fell by its biggest amount in over a year yesterday, after a total of seven ministers resigned after a draft withdrawal agreement was reached on Wednesday between Britain and the EU. Dominic Raab was the most prominent resignation and is now the second Brexit secretary to go in just six months which does not inspire confidence in this Brexit deal. The deal which was supposed to unite Leave and Remain has for the moment united much of Parliament against the Prime Minister.
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Whilst Theresa May has the overall backing of her cabinet for this deal, that support is not unanimous. The biggest concern for Parliament is that the agreement binds the UK to a customs arrangement with the EU, with no unilateral way of getting out in the future.
The legal text is now being scrutinised to establish what the detail in the 575 pages means for the UK and its implications for the future of Britain.
Jacob Rees-Mogg who chairs the backbench European Research Group has called for a vote of no confidence in Theresa May, which is keeping pressure on the pound. For this to happen there must be a total of 48 letters sent to the 1922 committee which would trigger a vote. Whether or not this would ultimately topple Theresa May is less clear as there would need be a secret ballot, which would require much more support to oust her. At least 159 MP’s would have to vote against May in the second round. Jacob Rees-Mogg has said that he expects 48 letters to go in. More resignations in these coming days are to be expected, leaving a gloomy outlook for sterling exchange rates.
For the moment though the Prime Minister continues to look extremely resilient, and her approach is to stick with this deal which she is now taking to the country. She must now also find a replacement Brexit Secretary which appears to be proving awkward. Environment Secretary Michael Gove has turned down the offer, citing he would want to negotiate a better deal with the EU which raises questions as to whether we may see another resignation.
Expect a news heavy weekend with heavyweight politicians from all sides of the Brexit debate making statements. This is likely to result in considerable volatility for sterling as we move into next week. The biggest hurdle will be when Parliament holds a meaningful vote on the deal that Theresa May has agreed. This is expected to take place in the middle of December and will arguably be the biggest undertaking for the Prime Minister (if she is still there) throughout her premiership. She said in her cabinet statement that the alternative to this deal is “to leave with no deal or no Brexit at all” and so politicians need to decide which direction to go.
UK retail sales data released yesterday arrived worse than expected at -0.5% for the month of October but went largely unnoticed. All bets for an interest rate increase from the Bank of England in the near future are now off, which was reflected in the drop in sterling. With no UK economic data releases today, the markets will be almost entirely driven by Brexit developments as the political tension builds. Sterling now faces a brutal couple of days as the markets prepare for more ministerial resignations and a potential leadership challenge all of which point to a downward trend for the pound.
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