(Bloomberg Opinion) -- Boris Johnson and the European Union may have emerged from their famous negotiating “tunnel” to brandish a new Brexit deal, but currency traders are still very much in the dark.
Sterling leapt after Thursday's breakthrough but it quickly pared those gains on the realization that Britain’s prime minister will struggle to get this deal past the House of Commons in a vote on Saturday. Johnson doesn’t have a majority and the parliamentary arithmetic is fiendishly complicated. The opposition of his erstwhile allies, Northern Ireland’s Democratic Unionist Party, doesn’t help.
The pound is back hovering around the $1.28 to $1.29 mark, where it was on Thursday morning before the deal was announced. You can see why traders are cautious about Saturday’s vote, which is pretty much a coin toss.
There have been suggestions that this week’s breakthrough has killed the ugly prospect of the U.K. crashing out of the EU without a withdrawal agreement. Not everyone in the markets sees it that way. If there was absolutely no threat of a no deal, you might expect sterling to start rising well above the $1.30 level. No one’s getting carried away.
Neither no deal nor a second referendum have been ruled out definitively, and either outcome would probably see a sharp downward correction for the pound. Johnson will probably try to frame the Commons vote as his deal or no deal. But there’s serious talk too of the opposition Labour Party pushing for a referendum to confirm any deal. That would simply extend the uncertainty, not ideal for any risk manager.
Even if Brexit is resolved, we’ll need a general election soon. Johnson would be boosted by his delivery of the seemingly impossible, and the Tories are leading in the polls, but he has taken a gamble by alienating remain-supporting Conservatives and Scottish voters.
Labour’s hard-left leader Jeremy Corbyn has been hopelessly confused on Brexit, but he would be back on firmer ground fighting an election on a wealth-bashing, austerity-ending platform. The prospect of Corbyn as prime minister is a bigger fear for sterling investors than even no-deal Brexit.
Short-sellers have reduced their pound bets as the Brexit mood music has lightened, but this means more volatility as there are more open positions in the market. Expecting the pound to recover all of its losses since the 2016 referendum, or even this year’s highs of about $1.33, is a stretch. The economy isn’t as strong as it was three years ago.
An approved deal will probably see sterling settle into a higher range but until the details are nailed down, and the election concluded, there are too many moving parts for a sensible investment perspective. Uppermost is thrashing out an EU-U.K. trade deal. As German Chancellor Angela Merkel says, the U.K. will be a competitor; and the EU will no doubt act in its own interests. Sterling is far from a one-way bet even if Johnson prevails.
To contact the editor responsible for this story: James Boxell at jboxell@bloomberg.net
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Marcus Ashworth is a Bloomberg Opinion columnist covering European markets. He spent three decades in the banking industry, most recently as chief markets strategist at Haitong Securities in London.
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