Sterling weakened against many major currencies this week, including the euro, US dollar and New Zealand dollar. In part, this is because the financial markets aren’t so confident that the UK and the EU will agree a Brexit deal in the foreseeable future as they were last week.
This is even though the UK Supreme Court ruled that Parliament can reconvene, as Prime Minister Boris Johnson’s decision to prorogue, or suspend, the legislative chamber was declared illegal.
Meanwhile, UK economic data this week was mixed, with the UK’s manufacturing sector slowing further in September, according to the CBI (Confederation of British Industry), although the UK’s far larger retail sector exceeded forecasts.
This week the UK’s Supreme Court ruled that PM Johnson’s decision to prorogue Parliament was unlawful. The judgement was unanimous, with all 11 senior judge’s ruling against the government.
Presiding judge Lady Brenda Hale said that prorogation “had the effect of frustrating or preventing the ability of Parliament to carry out its constitutional functions without reasonable justification.” This is to say that the Supreme Court agreed that Mr. Johnson had prorogued Parliament to prevent MPs scrutinising his Brexit plans, rather than to prepare his domestic legislative agenda.
Moreover, Lady Hale added that “because [prorogation] was illegal, it didn’t happen”, meaning that MPs have immediately reconvened in the House of Commons, to ask Mr. Johnson for explanations and examine his Brexit progress. Some investors think that, with Parliament in session again, MPs will be better able to prevent a ‘No Deal’ Brexit.
However, although the Supreme Court’s decision perhaps makes a ‘No Deal’ Brexit less likely, it’s simultaneously stalled last week’s Brexit progress.
First, this is because, to attend the opening of Parliament, PM Johnson had to fly from the United Nations General Assembly (UNGA) in New York. Here, Mr. Johnson was meeting EU leaders such as German Chancellor Angela Merkel and French President Emmanuel Macron. So, the PM has had to cancel or delay those meetings.
Second, what with Mr. Johnson the leader of a minority Conservative government, opposition MPs are in a strong position to control Parliament’s legislative agenda. For example, the opposition parties have refused to let Parliament go to recess, so that the Conservatives can hold their annual party conference, as is convention.
Moreover, opposition MPs continue to turn down Mr. Johnson’s calls for a general election, until a ‘No Deal’ Brexit is firmly off the table. So, it’s arguable that Mr. Johnson is being held hostage in No. 10 Downing Street, unable to govern, yet with limited powers to amend the situation. This adds to the lack of Brexit clarity.
In addition, if Mr. Johnson succeeds in negotiating a new Brexit deal, he’ll need to pass this through the House of Commons. However, as the PM is the leader of a minority government, he may struggle to do this.
The EU knows this, which could make Brussels less disposed to negotiate with Mr. Johnson in the first place, if they think he doesn’t have the Parliamentary support to pass the agreement. This seemingly leaves the UK’s Brexit situation in limbo this week, which has weakened the value of sterling.
Turning to the UK’s economic data this week, the performance has been mixed. On the bright side, the UK government borrowed just £5.776 billion in August, below forecasts for £6.650 billion. This tells us that the UK government took out fewer loans from the financial markets than expected last month, which will contribute to lift the national debt less quickly.
Elsewhere, the CBI’s monthly distributive trades survey, which measures the performance of Britain’s vast retail sector, rose to -16% this month, above predictions for -26%, and August’s -49%.
Yet on the other hand, the CBI’s industrial trends survey, which measures the UK’s manufacturing output, fell to -28 this month, well below August’s -13. This mirrors a global downtrend in factory performance, as the United States’ and China’s trade war weighs down the world’s appetite for manufactured goods. In addition, the Brexit uncertainty is also cutting demand for the UK’s industrial offerings.
Looking to next week, next Monday 30th September, we’ll learn the next estimate for the UK’s GDP (Gross Domestic Product) for Q2 2019, between April and June. In addition, next week IHS Markit’s PMIs (Purchasing Managers Indices) for the UK’s manufacturing, construction and services sectors will be released. If these exceed or disappoint investors’ forecasts, it may affect sterling, alongside the evolving Brexit situation.
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