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NEWS ANALYSIS

Firm sterling points towards support for May's strategy

She is relying on Brexiteer and other Tory MPs plus the DUP to back her Brexit withdrawal deal with tweaks

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Withdrawal legislation aimed at extending the March 29 withdrawal date will open the door to a potential referendum with the hope of voters changing their minds and choosing to remain in the EU.

London

CURRENCY and stock markets are betting that the UK will avoid crashing out of the European Union with no deal.

The view, supported by firm sterling and UK shares and bonds, contends that either Prime Minister Theresa May's latest strategy will work or parliamentary amendments will counter a no deal scenario.

Since sterling's 2019 low at the beginning of January, the currency - albeit slightly below its recent peak - has risen by 3.6 per cent against the US dollar, by 3.5 per cent against the euro and by 3.4 per cent against the Singapore dollar. The FTSE 100 index, also marginally below its January top, is 6.4 per cent higher than its late December 2018 low.

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Steve Barrow, currency analyst at Standard Bank, maintains that the pound is undervalued. If Brexit is settled favourably, the currency could rally to more than 1.40 against the US dollar, he predicts.

Following an overwhelming victory against Labour opposition leader Jeremy Corbyn's no confidence in the government motion, Mrs May has reverted to her traditional supporters. She has decided to rely on Brexiteer and other Tory MPs plus the Democratic Unionist Party (DUP) to back her Brexit withdrawal deal with tweaks. Mrs May overwhelmingly lost the first vote on her deal because these MPs did not support it. The main reason was dissatisfaction with the so called "backstop" to ensure that the border between Ireland and Northern Ireland remains open. This effective insurance deal would come into play if the government failed to negotiate a trade deal with the EU by the end of 2021. Brexiteer and DUP MPs have been concerned as the backstop would require the UK to remain in the EU's customs union in perpetuity, and the country would not be able to negotiate independent trade deals with the US, Asia and other countries.

Following government discussions, these MPs have become more flexible. But the proviso is that the 27 EU nations make a legal provision in the withdrawal accord that there would be a time limit to the backstop. The EU should thus also compromise.

Mr Corbyn has refused to meet Mrs May unless she can guarantee that the UK does not leave the EU with no deal. But legislation would have to be changed. After the 2016 referendum, Parliament voted overwhelmingly for a Withdrawal Statute stating that regardless of a deal or no deal, Britain would leave the EU on March 29 this year.

Mrs May has been meeting other party leaders and MPs who are involved in the Brexit process. Some want a second referendum, others a permanent customs union with the EU, others a so-called "Norway plus" option that keeps the UK in the EU single market and customs union. A vote, however, is necessary for all these options, but few commentators believe that they would achieve a majority.

In a statement, Mrs May said that she had identified three key changes which could secure Parliamentary support for a deal. Firstly that her government would be more "flexible, open and inclusive" in engaging parliament in their negotiations with the EU. Secondly, they would embed protections on worker rights and environment, and finally that the government would work to ensure that the Northern Irish border issue is resolved in a way that both the EU and UK can support.

Mrs May remained adamant that she would not support a second referendum. She also refused to rule out a no-deal Brexit as the EU also fears such an outcome. This possibility is a negotiating tool to persuade Ireland and the EU to be more flexible about the backstop.

If Mrs May's strategy fails, the markets believe that parliament will still be able to prevent a no-deal scenario.

Several amendments to the withdrawal legislation are aimed at extending the March 29 withdrawal date. This would open the door to a potential referendum. The hope then, according to proponents of this outcome, is that voters would change their minds and choose to remain in the EU.