What a Soft Brexit Means for the British Pound

(Bloomberg) --

The pound will see a short-lived boost if U.K. lawmakers signal support for a soft Brexit Monday, according to analysts.

Members of Parliament will hold indicative votes on various alternatives to Prime Minister Theresa May’s thrice-defeated withdrawal agreement Monday, with strategists seeing the motion calling for a permanent customs union with the European Union as the most likely to garner a majority. Nomura International predicts sterling could gain should that option pass, but said the move might be limited as the results aren’t binding on the government.

“It’s a baby step toward a softer Brexit, but doesn’t really answer the problems of the Irish border,” said Jordan Rochester, a currency strategist at Nomura. “Also the government may not accept it. So it’s not a simple up/down eureka moment.”

Sterling rose 0.6 percent to $1.3110 as of 1:48 p.m. London time, while it appreciated 0.4 percent to 85.70 pence per euro.

Here’s a roundup of strategist views ahead of the votes, which are expected to start about 8:00 p.m.:

ING Bank NV (Extension Likely)

• A permanent customs union is “most likely to command majority support,” according to James Smith, economist at ING
• Sees a 25% chance of the indicative vote leading to the government seeking a change to the deal with the EU
  • This would mean a longer extension to Article 50, beyond April 12, and could boost sterling to $1.40 and 81 pence per euro
• The risk of no deal by April 12 still looms, with ING giving it a 20% chance
  • That could drag sterling to $1.13 and to parity versus the euro
• If May’s deal passes before April 12, the pound could touch $1.35, with ING seeing a 15% chance of that happening

Nordea Bank ABP (No Majority)

• Andreas Steno Larsen, a currency strategist at Nordea, sees none of the options gaining a majority Monday
• “I don’t think it will weaken sterling by more than 0.5%,” Steno Larsen says
• “The market is shrugging off all the bad news, as no one really believes that this will end bad”
• Chance of custom union and/or public vote winning are “very very slim,” but if they do, it could boost sterling 3-4% because it will be a surprise

Canadian Imperial Bank of Commerce (Abstention Focus)

• Confirmatory referendum and customs union “likely to remain at the top of the pile” in terms of motions gaining a majority, says Jeremy Stretch, CIBC’s head of G-10 currency strategy
• Scale of abstentions will be in focus, and a solid majority could bounce sterling toward $1.3135-$1.3145
• If none of the motions pass then the pound could correct back toward $1.3000-$1.3010
• Maintains the view that a softer exit will be the most likely outcome, and predicts sterling will climb toward $1.39 by the end of the year

Toronto-Dominion Bank (Dips Faded)

• “If none of the options pass, which would not come as any great surprise at all, then cable probably sells off a bit, but the dip gets bought on extension hopes,” says Ned Rumpeltin, the European head of currency strategy at TD Bank
• Sees the pound trading around $1.30 by the end of June

To contact the reporter on this story: Anooja Debnath in London at adebnath@bloomberg.net

To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net, Scott Hamilton, Anil Varma

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