Buckle up for sterling and the new British leader

Most of the major currencies have remained quite range bound in the past few months.

Buckle up for sterling and the new British leader

Most of the major currencies have remained quite range bound in the past few months.

In particular, the euro-dollar rate has been confined to a narrow €1.11-1.14 corridor since February.

The exception to this trend has been sterling.

The UK currency made good ground in the opening quarter of this year on rising hopes for a soft Brexit.

However, it has come under renewed pressure since early May because of the growing risk of a no-deal hard Brexit, with Parliament log-jammed on the issue and a more eurosceptic Prime Minister set to take over the reins in Downing Street this week.

The pound has fallen back from a high of $1.32, to as low as $1.24.

Meanwhile, sterling has given up all the gains it made against the euro earlier in the year.

The euro is back trading around the 90p level versus sterling, up from 85p at the start of May.

Not much is likely to happen on the Brexit front in August, with both politicians and public servants across Europe on their summer holiday breaks.

Thus, the sterling market may enter the summer doldrums, trading around the 90p level against the euro.

The September-October period, though, will certainly see the focus on Brexit ramped up, as we approach the latest cliff-edge date of October 31 for the UK’s departure from the EU.

With no clarity on the issue, the post-Brexit referendum lows for sterling of 93p against the euro and €1.20 versus the dollar could be tested by nervous traders, if fears continue to grow of a no-deal Brexit.

There is much speculation about what the new Prime Minister will do on Brexit.

However, he does not need to do anything if he just wants to take the UK out of the EU.

The default position is that the UK will leave the EU at the end of October without a deal.

The only way to prevent a no-deal Brexit is for either the UK Parliament to ratify the withdrawal agreement, or the EU to grant a further extension to the Article 50 process or renegotiate the withdrawal agreement, in particular the Irish backstop, to make it acceptable to Westminster.

With both the British Parliament and the EU keen to avoid a hard Brexit, it may be more 'High Noon' than 'Halloween' horror in terms of who blinks first to avoid the UK crashing out without a deal at the end of October.

Even if the EU gives more time, the Brexit process can’t carry on indefinitely.

The EU won’t continuously grant the UK extensions to Article 50.

Thus, at some stage, the UK Parliament will have to decide what it wants on Brexit, even if this means sending the issue back to the people for a final decision in another referendum.

It is all very well for Parliament to vote against leaving the EU without a deal, or indeed, to look to block the new Prime Minister suspending Parliament in October in order to allow a no-deal Brexit to proceed.

These are just stalling mechanisms.

The UK Parliament will have to agree on a way forward on Brexit.

Otherwise, the UK will face leaving the EU without a deal, if not at the end of October, then in the not too distant future.

Thus, while all the focus will be on the new Prime Minister, the ball is still very much in Parliament’s court when it comes to Brexit.

Oliver Mangan is chief economist at AIB .

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