GBP: Fight on the benches? - Rabobank

Jane Foley, Senior FX Strategist at Rabobank suggests that based on the weekend’s headlines, this week’s return of the UK parliament comes with the risk of some unsettling news for GBP. 

Key Quotes

“On Thursday the second reading of the EU withdrawal bill is slated to commence.  The principal aim of this bill is to transfer thousands of pieces of EU legislation into UK law on the commencement of Brexit.  However, there are concerns about the reach of powers that the bill will allow government ministers without the scrutiny of parliament.  Proponents argue that this is necessary given the complexity of Brexit.  Critics argue that this is a blatant use of “Henry VIII” powers and is dismissive of the role of MPs.”

“The fact that the Conservative government lost its majority in the June election is adding to the tension, since the government cannot afford to lose the support of many of its MPs.”

“Even without the risk that the delicate domestic political situation could unravel, a lack of progress on the current round of Brexit talks threatens to weigh on sterling.  Last week the third round of Brexit talks commenced and through a joint press conference between EU Chief Brexit negotiator Barnier and the UK’s Brexit Secretary Davis at the end of last week, it became clear that there were still significant gaps regarding the size of the divorce bill.  The EU’s position remains that legacy issues must be agreed before consideration of the future UK/EU relationship can be discussed.  Currently, the UK’s aim of moving onto trade talks next month seems in doubt.”

“Since the UK’s date of departure from the EU is now only 18 months away, there is a growing sense that time is becoming very short and that the risk of a ‘cliff-edge’ Brexit is rising.  Many companies in the coming months are likely to start implementing plans that assume a hard Brexit, some of which are likely to be irreversible even if a softer Brexit is the eventual result.  Our central projections put EUR/GBP at 0.96 on a 12 month view and to 0.98 in 15-18 months, though we do not rule out a move to parity if politicians fail to allay fears that a cliff edge is looming.”