Following a whirlwind week in Parliament, sterling has made gains on the interbank exchange market against its two biggest counterparts, the euro and US dollar, plus versus the Canadian dollar.

In part, this is because this Tuesday and Wednesday, MPs in the House of Commons voted first to take control of Parliament’s legislative agenda from the government, then to pass a bill preventing a ‘No Deal’ Brexit. At the time of writing, the bill is passing through the House of Lords, where it’s expected to be approved, and it will then go the Queen for Royal Assent.

The bill obliges Prime Minister Boris Johnson to ask the EU for another extension to Article 50. It's thought that MPs wish to extend Article 50 by three months, up to January 31st, to give Parliament time to discuss what sort of Brexit it wants, or to call a general election. This has supported the pound because, for the meantime, a ‘No Deal’ Brexit now looks somewhat less likely.

UK general election may affect euro

PM Johnson seeks to call a general election

However, it’s worth noting that, just because MPs have voted to block a ‘No Deal’ Brexit, the UK’s political outlook is by no means crystal clear. In particular, the Prime Minister pledged to expel any Conservative MPs who voted with the opposition to take control of Parliament’s agenda and, in the event, 21 Tory MPs rebelled. These include senior figures and ex-ministers such as former Chancellor Philip Hammond, grandee and ‘Father of The House’ Ken Clarke, plus ex-Attorney General Dominic Grieve. Before the vote, Mr. Johnson had a majority of just one MP, so he now finds himself the leader of a minority government.

As a result, on Wednesday Mr. Johnson sought to call a general election, to try and regain his Parliamentary majority as fast as possible. The PM argued that Jeremy Corbyn, the leader of the opposition Labour Party, has been clamouring for an election for over a year. However, Mr. Corbyn replied that he’ll only support calls for an election, once the legislation blocking a ‘No Deal’ Brexit has been ratified.

According to the UK’s Fixed Terms Parliament Act, a general election can only be called every five years, unless 2/3rds of MPs vote to go the polls early. On Wednesday, only 298 MPs supported Mr. Johnson’s motion, 136 MPs short of the total required. So while the UK looks likely to hold a general election later this year, it won’t happen just yet, thereby leaving the UK’s political outlook up-in-the-air.

UK economy looks closer to entering recession

Meanwhile, looking beyond Westminster, there’s increasing evidence that the UK economy is veering closer to recession. According to respected watchdog IHS Markit’s PMIs (Purchasing Managers’ Indices) this week, the UK’s manufacturing and construction sectors shrank faster in August, while the UK’s dominant services sector eased to 50.6, barely above the 50.0 figure that signals growth.

According to IHS Markit’s Chris Williamson, this puts UK GDP (Gross Domestic Product) on course to contract by -0.1% in Q3. Already, UK GDP shrank by -0.2% in Q2, so if we were to contract again over the Summer, we’d enter a technical recession.

With this in mind, looking ahead, both the UK’s deteriorating economic outlook and the shifting Brexit landscape could impact the pound.

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