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Latest #IGForexChat Reveals How Brexit Negotiations Are Affecting the Forex Markets

How close is the UK to finalising a deal with the EU? Only Theresa May and Michel Barnier truly know the answer to that.

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Brexit
French noted that investment in UK assets and stocks is “waiting in the wings” to find out what those barriers will be. Pixabay

With the UK due to formally leave the European Union (EU) in less than six months, Brexit negotiations are reaching a nervous climax.  Hopes remain that the UK government will secure a deal with the EU by the end of the year, but what impact are the Brexit talks having on the forex markets? How far could the pound fall if there is no deal reached? Would the pound be affected by a vote of no-confidence within the Conservative Party and Prime Minister Theresa May being replaced?

The latest #IGForexChat outlined the potential ramifications of Brexit negotiations on forex markets. IG’s Sara Walker interviewed two leading forex experts, chief economist Simon French and market analyst Nicholas Cawley, to help forex traders understand the implications of a hard or soft exit from the EU.

If you don’t have time to watch the entire interview, here are the main talking points as to whether forex traders should buy or sell sterling in the markets in the coming months:

Brexit
May’s spokesperson said both the Prime Minister and the Brexit secretary, David Davis, said the government would be robust when the EU withdrawal bill returned to the House of Commons after completing its passage in the House of Lords. Pixabay
What will happen to the pound if we reach 31st March 2019 without a Brexit deal?

Nicholas Cawley insists that it is highly likely that the UK government will know if a Brexit deal can be reached by the end of the year. Cawley said there will undoubtedly be “clear signals” ahead of the EU’s December meeting as to whether a deal is achievable.

According to Simon French, the UK parliament will have an influential role if talks move into the New Year. French believes January will be a crucial month for parliament as the amendments within the UK’s withdrawal bill will need approval. If the majority of MPs cannot agree on the bill, they will have the right to propose a “meaningful vote”. French believes this vote could “ask the government to go back to the negotiating table” and attempt to “extend Article 50”.

French also believes it is unrealistic to expect the price of sterling to be priced on a hard Brexit “until midnight on March 29th”.

In a Tuesday radio interview International Trade Secretary Liam Fox said it was not acceptable for the unelected House of Lords to try to block the democratic will of the British people, who voted by a 52-48 margin in June, 2016 to leave the EU.
The Independent newspaper Tuesday night reported that May was preparing for a Brexit meeting with select cabinet ministers Wednesday at which they will try to come up with a joint position on post-withdrawal customs relations following rejection of Britain’s existing proposals. wikimedia commons
How far could the pound fall against USD and EUR in the event of no deal?

French pointed to historical analysis of previous peaks and troughs of sterling against the US dollar. The IMF bail-out of the UK in the 1970s and Lehman Brothers/Northern Rock in 2008 resulted in “20-25%” declines, leaving the pound in the “high teens” i.e. $1.17-$1.20 to the pound. French believes a hard Brexit is “no more material than those previous events” and, as such, the pound could experience a similar decline next March.

On the subject of whether the pound will end up in parity with the euro, Cawley was quick to dismiss those claims.

How will Brexit affect the pound during the transition period?

Cawley was quick to predict that, if an extension to the UK’s transition period after leaving the EU is agreed, “it will initially weaken sterling”. However, he suggested that an extension may prove useful to some business sectors that may need that time to “get their house in order”.

On the flip side, Simon French is “slightly more bullish” about the transition period. He believes the expected discussions about a free-trade agreement will eventually uncover “the materiality of what trade barriers will look like” between the UK and the EU. French noted that investment in UK assets and stocks is “waiting in the wings” to find out what those barriers will be. He believes that, once clarity is achieved in the “Treaty text”, it will be easier to price things correctly.

Brexit,  Image source: www.catholicherald.co.uk
Representational Image, Brexit.
Will the pound be affected by the replacement of Prime Minister Theresa May?

On the subject of the value of the pound being influenced by the departure of Theresa May as Prime Minister, Nicholas Cawley believes sterling “would take it quite well” and that the price “wouldn’t go down”.

Cawley was quick to temper that by saying it would ultimately depend on the “favourite” candidates to replace her. He said that the prospect of Boris Johnson would be “hated” by many in the markets, yet a more “progressive” candidate such as Sajid Javid would be viewed more positively.

Are further interest rate hikes likely from the Bank of England?

Nicholas Cawley believes there is “no reason to push interest rates up at the moment”, despite inflation reaching 2.4% this year. Furthermore, Cawley finds it hard to believe that the Bank of England would dare consider raising interest rates in the event of a hard Brexit.

Both Cawley and Simon French expect little to happen on the subject of interest rates until May 2019, when the Bank of England “may start giving some signals” based on the first quarterly inflation report after the UK leaves the EU on 31st March.

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Brexit (Representational IMage) Image source: The Street

Interestingly, French suggested that the Bank of England could yet consider a rate hike “as early as February” with the ECB’s rate policy seemingly rigid and President Trump reportedly wanting the Fed to “go at a slower rate”. French believes this would encourage investors to “buy into sterling”.

How close is the UK to finalising a deal with the EU? Only Theresa May and Michel Barnier truly know the answer to that. French noted that “the history of the EU negotiations” would suggest that the Brexit talks will inevitably “go down to the wire”. Whichever way the scales tip, the forex markets are sure to be a fascinating place to be in the coming months.

Next Story

British Lawmakers Rejects Brexit Deal, May Faces Vote Of No-Confidence

The defeat also opens the way for parliament itself to take more control of any future negotiations with the EU.

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Theresa May
Prime Minister Theresa May leaves 10 Downing Street in London, Jan. 16, 2019. VOA

British Prime Minister Theresa May is facing a no-confidence vote Wednesday after members of parliament voted overwhelmingly against her plan to divorce Britain from the European Union.

Jeremy Corbyn, leader of the main opposition Labor Party, announced he had filed a motion of no confidence in the government immediately after the result Tuesday.

If May loses, Britain would hold a general election. But most analysts say they expect May will survive the vote, and the minority Northern Ireland party she relies on to keep her minority government in office has said it would back the government.

Tuesday’s vote was the biggest parliamentary reversal ever handed a sitting government, with lawmakers — including more than 100 rebels from her own ruling Conservative party — refusing to endorse a highly contentious Brexit deal.

The government’s defeat plunges into greater disarray Britain’s scheduled March 29 divorce from the European Union.

Britain, European Union, May
Anti-Brexit supporters hold European Union flags as they demonstrate outside the Houses of Parliament on Jan. 14, 2019. VOA

EU Brexit negotiator Michel Barnier said Wednesday that after the British parliament’s rejection, the risk of reaching the deadline with no deal in place is higher than ever.

The much anticipated historic vote by the House of Commons of a draft deal, which took two years of ill-tempered haggling with European leaders to conclude, now throws up in the air the whole Brexit project, with major questions remaining unanswered about when Britain will exit the EU, how it will do so and even whether it still will.

Just 202 lawmakers backed May’s deal with 432 voting against her deal. The defeat dwarfed the previous 1924 record when then-Labor Prime Minister Ramsay MacDonald lost a vote by 166, triggering the collapse of his government and a general election, which he lost.

After the vote, May complained “the vote tells us nothing” about what the Commons would agree to when it comes to Brexit.

Theresa May
Prime Minister Theresa May sits down in Parliament after the vote on May’s Brexit deal, in London, Britain, Jan. 15, 2019 in this image taken from video. VOA

Vote delayed in December

The defeat of May’s Brexit plan will give further momentum to a burgeoning campaign in the House of Commons, and among Remainers in the country for a second referendum, according to analysts. Remainers hope a replayed referendum would reverse the Brexit plebiscite of 2016, which Leavers narrowly won.

The vote on the deal, which was due in December but was delayed by the government when it became clear there was insufficient backing for it to pass, also leaves hanging in the balance May’s own future as prime minister. Her aides insisted at the end of a day of high political drama that she won’t resign.

“She is the person who has to deliver Brexit,” said British business minister Claire Perry, who said May doesn’t need to resign.

“There will be other attempts at this. There will be strenuous efforts to improve on the deal,” Perry said.

Earlier on Tuesday, May discussed post-defeat options and indicated she would plow on. Her officials say she will try to buy more time and return to Brussels to try to cajole EU leaders into a renegotiation.

But the sheer scale of the defeat throws into doubt whether even a reshaped Brexit Withdrawal Agreement would secure parliamentary approval in the future — that is, if the EU is prepared to reopen negotiations.

EU, May
European Commission President Jean-Claude Juncker holds a news conference at the European Union leaders summit in Brussels, Belgium Oct. 18, 2018. VOA

“Her Plan B, more of the same, is hopelessly optimistic,” said commentator Isabel Oakeshott.

EU chief Jean-Claude Juncker canceled an event planned in Strasbourg, France, Wednesday so he can remain in Brussels for possible emergency talks with May. May’s RAF jet was put on standby, readied for her to travel to the Belgian capital.

Juncker tweeted when news of the historic vote broke: “I take note with regret of the outcome of the vote in the House of Commons this evening. I urge the UK to clarify its intentions as soon as possible. Time is almost up.”

EU president Donald Tusk reflected the frustration of many in Brussels, tweeting: “If a deal is impossible, and no one wants no deal, then who will finally have the courage to say what the only positive solution is?”

As the vote neared, May’s aides made several last-ditch efforts to minimize the scale of the crushing defeat by offering amendments to the main motion on the deal that they hoped would peel away some of the Conservative rebels. But to their fury, Commons Speaker John Bercow, blocked their moves.

Labor’s Tulip Siddiq, who is pregnant, was pushed through the voting lobbies in a wheelchair after postponing a planned Caesarean section so she could vote against the Brexit deal.

Britain, May
Anti-Brexit demonstrators react after the results of the vote on British Prime Minister Theresa May’s Brexit deal were announced in Parliament square in London, Jan. 15, 2019.VOA

Noisy crowd awaits word

While the drama played out in the House of Commons, outside the parliament, noisy, placard-waving crowds of Brexiters and Remainers mounted protests urging the draft plan be approved or cast aside. There was a hush among the protesters in the minutes before the result was announced.

May has until next Monday to offer a new proposal to the House of Commons, but it isn’t clear what she will propose. EU leaders have flatly rejected the possibility of renegotiations several times since the deal was concluded in November. But with Tuesday’s defeat, which followed five days of intense debate, British officials hope Brussels now may offer enough concessions to secure parliamentary backing on a replayed vote on an amended deal.

In the run-up to the vote, which the government was bracing itself to lose, May offered a series of carrots and sticks, pleas and warnings, to try to persuade unenthusiastic lawmakers to back her deal. To Brexiters, she warned it could result in Britain never exiting the EU. To Remainers, she cautioned it might lead to Britain leaving without a deal.

Britain, May
Leavers hold up signs next to pro-European demonstrators protesting opposite the Houses of Parliament in London, Jan. 15, 2019. VOA

Final plea from May

Minutes before the vote, May told a packed and feisty House of Commons that they should “honor the democratic decision of the British people.” She said a vote against her deal would be a vote for “uncertainty, division and the very real risk of no deal.”

Corbyn countered that the “government’s own economic assessment clearly tells us it is a bad deal.” To accompanying jeers and cheers, he added, “This deal is the product of two years of botched negotiations in which the government spent more time arguing with itself than it did negotiating with the EU.

“We need to keep in mind that the vast majority of people in our country don’t think of themselves as Remainers or Leavers,” Corbyn said. “Whether they voted leave or remain two and a half years ago, they are concerned about their future. So, Mr. Speaker, I hope tonight that this House votes down this deal, and then we move to a general election.”

Britain , May
British Labor party leader Jeremy Corbyn talks to journalists outside the European Commission headquarters in Brussels, Belgium, Sept. 27, 2018. VOA

With the draft deal, May tried to square the circle between Britons who want to remain in the EU, or closely tied to it, and Brexiters. The withdrawal agreement would have seen Britain locked in a customs union with the EU for several years, while a more permanent, but vaguely defined, free trade settlement could be negotiated with its largest trading partner.

In the temporary customs union, Britain would have been unable to influence EU laws, regulations and product standards it would have to observe. And it would not have been able to implement free trade deals with non-EU countries.

Customs checks

The transition deal was agreed to avoid customs checks on the border separating Northern Ireland and the Irish Republic. But British lawmakers who voted against the deal feared Britain would be shackled indefinitely to the bloc, even if a final free trade deal couldn’t be agreed upon.

Both Brexiters and Remainers claimed the Brexit agreement May negotiated would turn Britain into a vassal state, a rule-taker and not a rule-maker. Brexiters maintained the deal would keep Britain too closely aligned with the EU.