Sterling floats on optimism that Brexit might be delayed, as foreign exchange traders are relatively certain that there won’t be a no-deal Brexit on 29 March. However, there is still the possibility of a hard Brexit as the EU leaders meeting this week might not come to an agreement on whether to extend Brexit.
British PM Theresa May, who ideally would like her deal to be approved in the Commons ahead of the EU27 meeting on Thursday, will ask for a delay. The European Council President Donald Tusk has already expressed his openness towards granting the British more time to rethink Brexit, but this should be approved unanimously by all EU leaders.
Theresa May would need to gain the support of the DUP, her Tory MPs and members of the Labour party, so she has at least 75 votes to get her deal voted. To make things worse, on Monday (18 March) the House of Commons Speaker, John Bercow, ruled out a third vote on the same deal and said that the government needed to bring forward a new proposition that was different “in terms of substance.”
But the whole Brexit impasse and uncertainty come with the territory as the event is unprecedented and no one can predict how political events will develop. In this sense, currency traders are taking things slowly.
In general, though, there is an absence of any downside pressure on the pound with the avoidance of a no-deal Brexit along with a possible exit in less than two weeks, which no longer seems so threatening to Britain and its currency, at least to some.
This week, the Bank of England policymakers will leave the benchmark interest rate unchanged at 0.75 percent. At the moment, there are no plans for tightening the monetary policy or to loosen policy for Brexit, as it is yet unclear how Brexit will unfold.
Lee Hardman, a foreign exchange strategist with global investment bank MUFG, said: “The path ahead is still uncertain. A no-deal Brexit is still on the table If the EU and UK can’t reach a timely agreement to extend Article 50. In that event, the Pound could fall back sharply.”
Hardman said that “Sterling will continue to be supported by the decision to request an extension to Article 50. Gains may be dampened in the near-term, but the overall consensus towards a delayed and potentially softer Brexit remains supportive for the Pound.”
The Pound: What to expect this week
This week, the pound will be possibly affected by Brexit and the BoE meeting. Any developments regarding Brexit in the UK, together with two meetings on Thursday, one with the EU leaders’ in Brussels and another one with the Bank of England (BOE) the same day, might cause volatility.
This week, the government will attempt to get, for the third time, May’s Brexit deal approved by parliament, or it will face the possibility of a Brexit delay, granted by the EU. The EU is expected to offer a delay in exchange to a second referendum, a general election or a strong plan. May’s deal might also appear more attractive to Brexiteers who would like to avoid a delay to Brexit.
Whether May’s deal is approved by parliament or Brexit is indeed delayed, the pound will possibly respond positively and continue its bullish performance.
The pound might suffer if the BOE decides on its Thursday meeting to change its statement to reflect the recent slowdown in the economy. Raffi Boyadjian, an economist at XM.com said: “The economy has no doubt slowed but the Bank seems unwilling to shift to a more dovish stance, reasoning that it should just be patient for now as an ‘orderly’ Brexit outcome can dispel much of the uncertainty by itself and hence, kickstart investment and growth. Overall, the BoE is unlikely to deviate much from this stance, but if there is any change, it’ll probably be towards a more cautious bias.”
Sterling and BoE’s decision on policy might be influenced by average earnings in January, which will be released on 19 March. If average earnings rise more than the 3.4% in January (3.2% including bonuses) that is forecast, inflation and interest rates will rise. This will boost expectations that the BOE will raise interest rates, resulting in Sterling rising higher. Higher interest rates keep greater inflows of foreign capital, and are positive for the pound.
The pound is also affected by inflation, which will be out on Wednesday. Inflation influences BOE policy and if it is shown to be negative in February, it might drive down the Pound. Currently, it is expected to rise by 0.2%.
Finally, there might be some weakness in the pound, due to a possible decline in retail sales in February, which will be released on Thursday. While it is forecast to show a -0.3% fall from 1.0% previously, a bigger drop could send the pound lower.