European elections in UK this week may likely decide sterling’s destiny

Labour MP Hilary Benn, the chairman of the UK parliament’s Brexit committee, told BBC radio last week that “there are only two ways out of the Brexit crisis that we’ve got: Either parliament agrees a deal or we go back to the British people and ask them to make the choice”.

Even if Theresa May were replaced by a eurosceptic as Conservative Party leader, a new Brexiteer prime minister will still face a parliament that is strongly opposed to a no-deal hard Brexit.

Thus, the current logjam is likely to persist as the UK heads for another cliff-edge Brexit date at the end of October.

Sterling gained ground in the opening quarter of the year in the belief that the UK parliament would block a no-deal Brexit and in the end, would approve some form of a withdrawal agreement that would allow for a soft Brexit.

However, the chances of success for the withdrawal bill that the prime minister plans to bring before parliament in early June look very slim.

Hence, the UK currency has weakened this month, with the euro rising from 85p to 87.5p.

Furthermore, with opinion polls showing very strong support for the Brexit Party in this week’s European Parliament elections, and with Ms May’s days as leader now numbered, and her government’s talks with the Labour Party on Brexit ending without an agreement, none of these events has helped sterling either.

In terms of Mr Benn’s observation, another referendum would likely mean a binary choice for UK voters: Leave the EU without a deal, or remain.

A very strong showing by the Brexit Party might encourage Leavers to consider another referendum as the only way to secure the hard Brexit they so desire.

The improved performance of the UK economy recently might also add to their belief they could win again in another referendum.

The UK economy lost momentum in 2017 and 2018 following the vote for Brexit in 2016. However, it picked up pace this year.

Consumer spending, in particular, has picked up, with real household incomes rising and inflation falling back.

Meanwhile, unemployment has fallen to 3.8%, a 45 year low.

Fiscal policy has also been loosened, with strong growth in government spending in the last two quarters.

Economic activity has also been boosted by stockpiling, as firms move to mitigate possible disruption to supply chains as a result of Brexit.

Another referendum could result in a binary outcome for sterling. The euro-GBP is currently close to the middle of the 85 pence to 91 pence range.

If the UK decided to remain in the EU, then the euro-GBP rate would likely move towards 80p.

A no-deal Brexit, though, would probably push the rate up close to parity.

As for the timing, if the UK does go down the referendum route again, it would most likely be held in the first half of next year, given the lengthy legislative process involved.

This would require a further extension to Article 50 and also mean that Brexit uncertainty could last for at least another year.

- Oliver Mangan is chief economist at AIB

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