- Sterling on defensive after latest Irish border proposals.
- Johnson sticks to deal-or-no-deal guns, says offer is final.
- EU poised to reject latest ideas aimed at replacing 'backstop'.
- Election and Art 50 extension are increasingly likely, some say.
- Nomura sells EUR/GBP, sees Art 50 extension and EUR weakness.
The Pound was on the defensive today as Prime Minister Boris Johnson's latest Brexit proposals were reportedly criticised in Brussels and after the Conservative Party leader told grassroots supporters that the plan was a "final offer" that must now be met with compromise from the EU.
The implication is the UK could now more likely be headed for either a divisive and damaging Article 50 extension that faciliates a risky general election, or a 'no deal' Brexit that would clobber the Pound.
The open border on the island of Ireland that's required by the Good Friday Agreement would amount to a backdoor into both the EU and UK single markets in the absence of matching regulatory regimes, although some in the 'leave' camp insist that such threats can be addressed with technology and adapted versions of systems that are already in place. But the EU has rejected all of the proposals put to it so far and the clock is now ticking down to October 31 and the expiry of the current Article 50 extension period.
"We doubt PM Johnson can reach a deal with the EU that can win over a majority of MPs in the fragmented UK House of Commons. If Johnson can’t reach a Brexit deal by 19 October, the Brexit date will likely be delayed from 31 October 2019 to 31 January 2020 and early general elections would probably take in place in November. While the risk of a hardâ€‘Brexit endâ€‘October is low, it cannot be ruledâ€‘out and this remains an important drag for GBP," says Elias Haddad, a strategist at Commonwealth Bank of Australia.
"A final observation is that the deterioration in public discourse both from MPs and the Prime Minister has undermined prospects of any deal being ratified, should one be reached with the EU27. Levels of trust between the government and opposition MPs are at all time lows," says Oliver Harvey, a strategist at Deutsche Bank. "If no agreement can be reached, however, then Brexit will revert to a constitutional battle between the UK [government] and Parliament. Our base case remains a caretaker government is formed, followed by an extension to Article 50 to facilitate new elections."
"GBP/USD again sold off yesterday following its recent failure at the mid-July high at 1.2580 and we suspect the market has topped here, and is likely to remain on the defensive. Minor support is found at the 61.8% retracement at 1.2196. Further minor support sits between the early and mid-August lows at 1.2080/15 and major support lies at the 1.1958 current September low," says Karen Jones, head of technical analysis at Commerzbank.
Midweek sees the Pound-to-Euro exchange rate trading at 1.1245, down from the week's high at 1.1304, while the Pound-to-Dollar exchange rate was at 1.2290 on Wednesday and down from an earlier 1.2344.
EU Poised to Reject Border Proposals, but GBP/EUR Draws Buyer
"I want to make clear we are not long GBP/USD. We continue to expect risk off and USD strength to apply and are short EUR/USD and AUD/USD. Both working very well indeed. But we are short EUR/GBP as hope is a powerful thing, the ECB is in a clear easing cycle and at some point rebel MPs should get their act together and art.50 will be extended (as the government can’t wriggle out of it)," says Jordan Rochester, a strategist at Nomura.
The danger for the Pound is that even with a potentially Brexit-nullifying election looming, fears of a 'no deal' Brexit could well start rising again, putting downward pressure on Sterling. This is because, with Johnson declaring this week's offer final and the EU rejecting it, the PM and Conservatives could now give up on looking for a deal and begin focusing their energy on securing an explicit electoral mandate for a 'no deal' Brexit.