Commenting on Sterling’s rally on hopes that a chaotic Brexit is no longer an option, Andy Scott, Associate Director at JCRA, the independent financial risk management consultancy, said: “Sterling has hit its highest level in ten weeks versus the Dollar and a month versus the Euro, on hopes that parliament will soon rule out a no-deal Brexit. Headlines that the labour party is highly likely to back a proposal that would prevent a no-deal Brexit, resulted in Sterling breaking above 1.30 versus the Dollar and close to 1.15 versus the Euro.
“Following May’s historic defeat in parliament last week, the market concluded that scale of the rejection of her deal would force a rethink over her “red lines”, prompting Sterling to strengthen. Despite the fact that May is sticking firmly to said lines, or perhaps because of it, MPs on all sides have found common ground against a no deal. No matter what one side of the debate might say about the UK leaving in March without a deal, there is broad consensus across individuals, businesses, economists and politicians that this would have negative economic consequences. This concern is one of the reasons why Sterling remains weak in historical terms.
“If the worst case scenario is no longer in play, Sterling looks slightly less risky and the outcome of Brexit begins to looks a little less ominous. Yesterday’s very strong employment data was also a factor, with faster wage growth a catalyst for the Bank of England to raise interest rates. Sterling has strengthened by 4% versus the Euro in the past two weeks, its best performance in over a year.
“While the market is suggesting Brexit risks have reduced, we would highlight that all of this optimism could be wiped out if the amendment isn’t passed in next week’s vote. Equally, if there were to be a general election as a result of a no confidence vote being passed, which Jeremy Corbyn continues to push for. This arguably would cause Sterling to slide aggressively due to the risk of a Labour government, as well as potentially beginning Brexit negotiations from scratch.”