Pound Touches Six-Month High Against Euro on Optimism for Brexit
The pound rallied to a six-month high against the euro as the Conservatives threw their weight behind the prime minister’s Brexit plan, raising hopes for a smooth departure from the European Union.
Sterling strengthened versus all of its Group-of-10 peers after Boris Johnson said every Conservative candidate has signed a pledge to vote for his Brexit deal if elected next month. This, together with opinion polls showing the Tories in the lead and Jeremy Corbyn’s Labour Party struggling, boosted confidence the Conservatives could get a Brexit deal through Parliament in time for Jan. 31 and end the U.K.’s political stalemate.
“Both culminate in the same outcome, which is that the withdrawal agreement has a higher chance of going through,” said Jane Foley, head of currency strategy at Rabobank. The pound’s “performance in the last few weeks has been linked to this perception that if the withdrawal agreement gets through Parliament then Brexit is done and sterling goes up.”
Strategists see a Conservative majority as the best outcome for the Dec. 12 vote, as it would mean Johnson can push through his Brexit plan and remove some of the uncertainty that has been a function of investing in the U.K. since the 2016 Brexit referendum. Traders worry that an outright win by Labour could hurt the pound, given plans to ramp up spending, nationalize utilities and hike taxes for the rich that could open up the risk of capital flight.
Sterling gained as much as 0.5% versus the euro to 85.22 pence, the highest since May 6. It strengthened as much as 0.7% to $1.2985. The yield on U.K. 10-year government bonds was steady at 0.73%.
Traders are gaining confidence that Johnson will maintain his lead, averting any shock result, a gauge of expected large moves in the currency suggests. The measure touched its lowest level since July, reflecting speculation the pound will trade within tight ranges.
Johnson took the decision to call the snap poll after lawmakers agreed to back his Brexit deal in principle but then fell short of giving it their full backing. His predecessor Theresa May failed three times to get her plan through Parliament, leading to the end of her premiership.
Johnson will be hoping that his election gamble pays off and secures him a majority that can pass the deal and thus move on to the next phase of Brexit -- securing a future trade agreement. The pound has outperformed all other currencies in the world so far this quarter, gaining 5.4% versus the dollar and 3.8% against the euro.
Still, not everyone is convinced an end to the Brexit deadlock will mean sustained gains for the currency. For Rabobank’s Foley, the market is losing sight of what comes next. If the prime minister does get his deal through Parliament, the U.K. will then have to begin trade talks with the European Union, a process that could be complicated by having many pro-Brexit lawmakers opposed to regulation inside the ruling party.
The economy is also giving investors reason to be cautious. Algebris portfolio manager Alberto Gallo is neutral on the pound as he sees the currency staying under pressure. The annual pace of economic expansion in the U.K. fell to the lowest in almost a decade last quarter, according to last week’s data.
“Over the longer term, risks to sterling remain to the downside as uncertainty continues to weigh on the investment and growth, leaving little room for the Bank of England to normalize rates,” Gallo said in an interview last week.
©2019 Bloomberg L.P.