Sterling 20 pound banknotes pass through an automated currency counting machine (Photographer: Matthew Lloyd/Bloomberg)

Pound Struggles to Take Flight After Cabinet Backs Brexit Deal

(Bloomberg) -- The pound edged higher, while failing to hold Wednesday’s strongest levels, after the U.K. Cabinet approved a draft Brexit plan, clearing a key hurdle to finalizing a divorce deal with the European Union.

Sterling struggled to rally even after Prime Minister Theresa May said an impassioned debate led to backing from her top ministers at a lengthy meeting on Wednesday. Brexit negotiators secured a deal on paper in Brussels Tuesday, yet the currency has fluctuated on worries that lawmakers could reject the agreement.

Pound Struggles to Take Flight After Cabinet Backs Brexit Deal

The currency has slumped about 13 percent against the dollar since the U.K. voted to leave the EU in 2016 and has since swung on the twists and turns of the negotiations. Failure to get a deal or Parliament backing this year could see a slump down to $1.20, while approval by lawmakers could drive a rally toward $1.40, according to strategists.

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“The pound isn’t rallying much because it’s by far the smaller hurdle,” said Vassili Serebriakov, a macro strategist at UBS Securities LLC. “We’ve always thought that Parliament approval is going to be the bigger hurdle, and that’s the next phase of uncertainty.”

Cabinet’s approval of the deal could see sterling strengthen to $1.35 and 0.85 against the euro over the next three months, at which point UBS would look to sell the pound, Serebriakov said. Cable was up 0.1 percent to $1.3010 as of 5:42 a.m. in London, after rising as high as $1.3072 on news of the deal.

With just over four months to go before the Brexit deadline, the agreement marks a significant step toward a two-year transition period and trade talks. It relieves some of the uncertainty for companies, including the banks and investment firms that crowd London’s historic financial center.

Strategists see a sustained rally being conditional on the Brexit text winning approval in Parliament. A majority of lawmakers must vote in favor for the deal to pass, and May faces opposition from both within her Conservative party and the opposition Labour. Anger among Conservatives is “so high” that a call for a confidence vote on May is possible, BBC editor Laura Kuenssberg said on Twitter, citing an unidentified member of the party.

Pound Struggles to Take Flight After Cabinet Backs Brexit Deal

If the deal is voted down in Parliament, it could lead to the U.K. having to return to the negotiating table, holding a general election or even a second referendum. The vote could be a “real knife-edge affair,” said Jeremy Stretch at Canadian Imperial Bank of Commerce.

Here’s what strategists and fund managers said after May’s statement:

Allianz Global Investors

  • Allianz Global is keeping its long position on the pound after May said she had the backing from her Cabinet, said money manager Kacper Brzezniak
  • “We hear a lot of noise from a lot of people, but in the end, I don’t think there is any support for no deal,” said Brzezniak
    • “If the deal gets done, GBP rallies a lot”

Danske Bank

  • “It’s difficult for the pound to strengthen much as there is still too much uncertainty,” said analyst Mikael Olai Milhoj
  • “It depends on the vote in the Commons and until we know whether it can pass or not, the pound will remain volatile”
    • Sees EUR/GBP moving down to 0.84 if it passes
  • The coming days will be very important as “the big game changer is when we get clarification on whether the deal can survive in the House of Commons or not”

Deutsche Bank

  • Though markets want clarity on Cabinet resignations, pound trading may end the day on a positive note near $1.30, says Alan Ruskin, global co-head of foreign-exchange research
  • The market “is also sending a message of continued concerns about getting this ratified in Parliament”
  • Without fresh negative news, levels near $1.30 are sustainable, Ruskin says

BMO

  • There is likely to be volatility in store for the pound through year-end in anticipation of continuing negotiations and angst surrounding Brexit, said Greg Anderson, global head of currency strategy
  • “There’s a lot of incentive for officials to soothe markets with stuff that gives false hopes,” especially in a time with “higher level of anxiety and angst”
  • BMO targets $1.26 for the pound in three months; says above $1.30 is a sell

Eurizon SLJ Capital

  • "Once the first hurdle falls, all the rest will fall, too, one by one," said Stephen Jen, CEO of Eurizon, a London hedge fund that’s betting the pound will rise to $1.50 in 2019
  • "My prediction is that many of these people who complained about the agreement will not stay opposed and will come around to backing it."

©2018 Bloomberg L.P.