Hopes that UK Prime Minister Theresa May could clinch a last-minute deal with the EU boosted sterling against the euro, as markets continued to predict that any Brexit involving Britain crashing out at the end of the month was most unlikely.
The pound rose 1% to 85.74 pence and UK shares indices which are closely tied to the British economy held up well, despite the political uncertainty surrounding Ms May’s deal in the Commons and the potential votes in subsequent days this week.
“All eyes turn to the UK political picture from here on in,” said Joshua Mahony, senior market analyst at online broker IG. “With less than three weeks until the UK is due to leave the EU, there is a feeling that little has been achieved since the UK electorate voted to leave,” Mr Mahony said.
“The most likely event is that we see a relief rally for the pound as a no-deal is rejected in favour of an extension to Article 50. However, with no one able to answer the question of how we will ever break the deadlock, an extension to Article 50 is merely kicking the can down the road without any plan of how to break the deadlock,” he said.
A stronger sterling helps Irish exporters selling into Britain as it makes their goods and services cheaper and more profitable.
However, the euro buys less which means that the prices of many items imported from Britain can rise significantly for shoppers.
Philip O’Sullivan, chief economist at Investec Ireland, said that the political drama at Westminster and the future of Ms May’s withdrawal plans have put economics in the shade for currency markets.
Markets continue to signal, as of late Monday, that some sort of deal will be secured that will take the no-deal outcome that entails Britain crashing out of the EU this month off the table.
“Expectations for a deal being done are more likely than not,” Mr O’Sullivan said.
UK gilts were little changed, with its 10-year bond trading at 1.17%. That compares with the Irish 10-year yield of 0.68% and the 0.06% yield for the equivalent German bond, reflecting expectations that the weakness of the eurozone economy will prevent the ECB from hiking interest rates anytime soon.
Meanwhile, the International Energy Agency has warned that a messy Brexit could affect growth in global oil demand over the next five years.
“Ongoing trade disputes between major powers and a disorderly Brexit could lead to a reduction in the rate of growth of international trade and oil demand,” it said in its medium-term oil-market report, which covers the period to 2024.
The rise in oil prices this year has been tempered by concerns over oil consumption following the US-China trade dispute. The Paris-based IEA, which advises most major economies on energy policy, didn’t quantify the impact on demand in the event the UK leaves the EU in a disorganised fashion.
And Ryanair has triggered contingency plans to restrict the voting rights of British shareholders if the UK leaves the EU without a deal. Its board passed a number of resolutions last week which will become effective on the date British nationals become non-EU nationals, the airline said.
Additional reporting Bloomberg and Reuters