Pound Reaches Four-Month High Amid Brexit Breakthrough Optimism

The hopes of a breakthrough agreement between the UK and the European Union (EU) made the pound and stocks of banks soar high as speculations reached their peak that the UK and EU may have almost come to a conclusion w.r.t. a “draft divorce agreement.” The prime minister Boris Johnson has taken a defiant stand to not entertain any further delay to Britain’s exit from the EU. This anticipation of Britain’s departure caused the pound to climbed up by 1.4% against the US dollar, covering the losses made at the beginning of the year.

The sterling traded above $1.30 in the midst of the hope that Boris Johnson would win the backing of the parliament. The prime minister would once again make an attempt this Monday to make the lower house or the House of Commons to “endorse in principal the divorce agreement.” However, if the parliament voted in favor of a delay, there could be a sharp fall in the market though strategists and market experts have pointed out that any decline in the currency would not last long. The parliamentary vote would be decided by a small margin, and the sterling has not been able to augment or sustain its gain after having reached the threshold of $1.30.

Lee Hardman, one of the strategists at MUFG, wrote, “It’s all to play for, and while the numbers in parliament are extremely tight, we would give the probability of success for the government at 60 percent either today or tomorrow. We would expect to see sterling into a new equilibrium range of $1.30-$1.35 if the parliament approves the deal as we expect.” As the value of the pound fluctuates, rising high with the growing optimism of the exit deal and declining a little when the latter seems a bit difficult to be passed, the task of the prime minister does not seem to be an easy one.

Although analysts have claimed that Johnson would secure the majority needed to approve the departure deal, he has to convince the legislators to get it passed in the Parliament. This may not be as simple as it seems as the lawmakers have to be obtained in line, a task which the former prime minister Theresa May failed at thrice. Moreover, Johnson has already faced successive defeats in Parliamentary votes, seven times in a row, soon after he had resumed power, which makes the Brexit vote even more decisive. Valentin Marinov, head of Group -of-10 strategy at Credit Agricole SA, has remarked:

The price action today suggests that the FX investors are fairly comfortable holding on to their pound positions, notwithstanding the lingering political uncertainty in the UK. This could point at further pound resilience on the back of abating concerns about a no-deal Brexit and hopes for a Brexit deal.

A slight aberration from this wave of optimism is the word of caution given by some analysts that a customs union may be considered along with some amendments that may be in the way of a second referendum. Petr Krypata, the chief currency strategist at ING Bank, has pointed out in this regard that the amendments carry the potential risk elements, even if the vote goes in favor of the government. Therefore, it is to be seen whether the bill would be passed by the lawmakers eventually, to the government’s relief, and what impact it would have on the pound. Notably, an automotive behemoth like Jaguar Land Rover is planning to a scheduled five-day shutdown of its factories in the country considering Brexit.

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