The pound remains volatile this week as the current Brexit deal on the table between the UK and EU is being scrutinised by Members of Parliament, ahead of the meaningful vote in the House of Commons expected around the 11th December.
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Expect the debate to become more heated after the treasury published economic analysis papers on the long term impacts of Brexit yesterday, which highlighted a negative hit to the economy for each different version of Brexit. The Bank of England has also published its own Brexit impact assessment. The Central Bank has predicted a gloomy outlook in the event of a disorderly Brexit. In a worst case scenario the pound would fall by 25% to less than parity against both the US dollar and the euro. Unemployment would also rise to 7.5% whilst house prices are forecast to decline 30%. It is now down to MPs to weigh up these predictions and decide whether to vote with the Prime Minister or not.
The final destination for Brexit continues to be the single biggest driver for sterling exchange rates, as the markets try to guess the outcome of this key vote. So far there has been a fairly hostile response to the deal and Jeremy Corbyn has signalled that Labour will not back it. Perhaps more troubling for Theresa May is that the former defence Minister Michael Fallon who has been incredibly loyal to her stated he could not back the deal and that it was doomed. The arithmetic in the House of Commons and the lack of support from the DUP would suggest that this deal is less than likely to go through which should make for a hugely volatile couple of weeks ahead. The pound has also come under added pressure after US President Donald Trump said this week that the UK EU agreement looks like a “great deal for the EU” whilst suggesting it would be difficult for the UK and US to reach a future trade deal together under the EU terms.
There are a number of different outcomes that could follow if the deal does not go through, all of which will create more uncertainty for GBP: A second vote in the commons would see Theresa May go back the EU to make changes to the deal. The EU have stated that there will be no further changes. Theresa May would hope that as the prospect of a no deal approaches then it may force politicians to vote with her second time round.
There could be a change of Prime Minister if she resigns or if there was a vote of confidence. If she can’t get the vote through the commons then those letters to the 1922 back bench committee could start coming through triggering a vote, creating more weakness in the pound as was seen a fortnight ago. A second referendum is also being promoted although Government policy under Theresa May is firmly against one. Labour would like to see a general election in these times but failing that it would support a second referendum.
The no deal Brexit scenario cannot be ruled out either and there would likely be a push from the Leave side of the argument to pursue this course. A “Managed No Deal” has been gaining traction and up until last night was supported by cabinet Minister Andrea Leadsom although she is now backing the Prime Minister. Finally there could be a move for Britain to stay in the European Economic Area (the Norway Option) although Labour have written this version off.
Economic data is light as we end the week with mortgage approvals data this morning and consumer confidence data tomorrow. Brexit will invariably remain the driving force for sterling exchange rates with considerable risk to the downside at this juncture.
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