Sterling starts to reflect possibility of early UK election

Sterling fell slightly as Theresa May lost a vote for the third time for her EU withdrawal deal, which could bring a UK general election closer.

Sterling starts to reflect possibility of early UK election

Sterling fell slightly as Theresa May lost a vote for the third time for her EU withdrawal deal, which could bring a UK general election closer.

Since the UK voted in a referendum in the summer of 2016 to leave the EU, the pound has been a reliable gauge of investors’ fears over a crash-out or hard Brexit.

It is also highly important for Irish firms selling into the UK, as well as prices in Irish supermarkets, as so many grocery items are exported from Britain; and for many stockmarket-listed companies exposed to sterling because a large slice of their sales are generated in the UK.

Fears of the UK leaving without a deal have nonetheless declined as the Commons rejected a crash-out outcome in recent weeks, but other factors may likely be influencing the currency, such as the possibility of an early general election in the UK.

After the Commons voted by a majority of 58 to reject Ms May’s deal, sterling traded at 86.10 pence against the euro, slightly lower on the day.

Lee Evans, head of foreign exchange trading at Bank of Ireland Global Markets, said the 58 votes margin means Ms May has “plenty of work to be done to get the deal approved”.

“Sterling immediately fell on the announcement of the result. Although the chances of a long extension have risen, markets have reflected an increased chance of a UK general election in the value of the pound,” Mr Evans said.

Investors are now focusing on the next round of indicative votes in the Commons next week.

“If they cannot form a consensus Monday about an alternative I would begin to worry,” Rabobank strategist Jane Foley said.

“Monday is extremely important. [Friday was] a necessity, that deal has to be declared dead for MPs to move on and find something fresh,” she said.

Alan McQuaid, economist at Investec Ireland, said that sterling would continue to reflect uncertainty about UK politics and Brexit for some time.

However, he said his personal view was that the UK currency could rally towards 80 pence if the uncertainty were to lift. A strong pound tends to favour Irish exporters selling into Britain.

After Ms May’s latest defeat, Chambers Ireland said that a long delay and prolonged Brexit talks were now needed.

We now call on the UK government to put a multi-year extension in place as a matter of urgency and remove the threat of a no-deal exit. It’s time to end the brinkmanship and put the economy, and the needs of the business community ahead of the political dealing.

"Brexit can wait for another day,” said its chief executive Ian Talbot.

Capital Economics in London said it was “not inconceivable” Ms May would attempt for a fourth time to bring her deal to a vote next week.

“We had anticipated a shift to just one scenario for the economy and markets by [Friday], the original Brexit date. In the event, we will have to wait at least two weeks more,” it said.

Meanwhile, Chris Beauchamp, chief market analyst at online broker IG, said stock markets had been boosted by hopes of progress in the China-US trade talks.

“This is another long- running issue, but one that might see a resolution before the end of 2019, in stark contrast to Brexit,” he said.

Additional reporting by Bloomberg.

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