Brexit Deal Done, But Will It Pass?

The UK & EU agree a new Brexit deal, though sterling’s gains are short-lived as the Agreement’s passage through the Commons remains uncertain

Previous Day's Market Highlights

With 14 days to go until the Brexit deadline, the UK and EU reached agreement on a fresh Brexit deal on Thursday; though sterling's euphoric reaction to the news was rather short-lived. The deal removes the contentious Irish backstop, replacing it with a 'frontstop' - a permanent legal state of Northern Ireland remaining solely within the UK's customs area, while closely abiding by some of the rules of the EU's Single Market. A complicated system of customs duties will then be in place, with duties being collected at "points of entry", and a complex system of rebates in place dependent on the eventual destination of the goods in question. The new arrangements give the Northern Ireland Assembly a vote on the provisions after 4 years, while also mandating that EU law on VAT will apply in Northern Ireland, on goods only. Other areas of the deal remain largely similar to Theresa May's agreement, namely the transition period until December 2020, protection of citizens' rights and the financial settlement.

However, the reason for sterling's lacklustre reaction is that, once again, the deal's passage through Parliament is highly uncertain. The DUP have already voiced their opposition to the plans, while other opposition parties are highly unlikely to vote in favour of the arrangements. Hence, the Parliamentary arithmetic means the Prime Minister will have to rely on a number of Labour rebels, and the support of all Tory MPs, in order to pass the deal in Saturday's vote. While the numbers will be tight, my hunch is that the deal will pass, with the PM set to frame the vote as 'this deal, or no deal' in Saturday's sitting.

Turning to the pound, initial reaction to the news of a deal being reached was a significant rally, with sterling surging to fresh 5-month highs against both the dollar and euro. However, as time progressed, increased scepticism over whether a deal would pass exerted pressure, resulting in the pound erasing almost all of its earlier gains. Against the dollar, having rallied to just shy of $1.30, the pound settled 0.25% higher, trading within a 200 pip trading range for the 3rd straight day. Against the euro, sterling settled 0.15% lower; while the pound experienced a similar rollercoaster ride against most other majors. 

Elsewhere, a number of softer than expected US releases weighed on the dollar, which shed 0.4% over the course of the day. September's Philadelphia Fed manufacturing index fell to 5.6, a 4-month low, while housing starts and building permits figures were both poorer than expected. Meanwhile, the euro gained ground, settling around 0.4%, largely as the tail-risk scenario of a no-deal Brexit was priced out by market participants.

Thursday's biggest mover was the Australian dollar, which gained just shy of 1% after better than expected labour market figures dampened the chances of an imminent RBA rate cut. The Kiwi dollar rode on the coattails of its antipodean cousin, gaining around 0.8% over the course of the day. Meanwhile, the Canadian dollar gained just over 0.5%, supported by firmer oil prices.

In other asset classes, equity markets gained ground on both sides of the Atlantic. In Europe, the pan-continental Stoxx 600 advanced 0.2%; while the US benchmark S&P 500 closed 0.3% higher, supported by strong earnings. Finally, oil prices also firmed, benefitting from a weaker dollar, with both Brent and WTI settling around 1% higher.

Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.1545 1.1661 1.1086 4.93%
GBP/USD 1.2840 1.2990 1.2195 6.12%
EUR/USD 1.1120 1.1140 1.0879 2.34%
GBP/AUD 1.8800 1.9094 1.8076 5.33%
GBP/NZD 2.0165 2.0559 1.9311 6.07%
GBP/CAD 1.6875 1.7095 1.6191 5.29%

Today's Market Highlights

Sterling traders, and Government whips, are likely to spend most of the day ahead deep in spreadsheets, as everyone crunches the numbers to see whether the Prime Minister's Brexit deal will pass in Saturday's Commons vote. As mentioned above, the arithmetic is incredbily tight, hence all eyes will be on the decisions of those MPs who may be wavering between voting for, or against, the deal. Any signs that the likelihood of Parliamentary approval is increasing will likely be met with sterling upside, while further doubts over the approval of the deal will likely exert pressure. 

The vote itself is set to take place on Saturday afternoon, after the Prime Minister has made a statement to the House on both the EU Summit, and the new Brexit deal. MPs will first vote on whether to approve the new Withdrawal Agreement - the fourth 'Meaningful Vote' on a Brexit deal. If the deal passes, the Commons will then pass relevant legislation relating to Brexit in the coming days, before the UK leaves the EU on 31st October. On the other hand, if 'MV4' fails, MPs will be asked to approve leaving the EU without a deal. Lawmakers have, on a number of occasions, indicated their opposition to such an outcome, meaning such a motion is unlikely to pass. Failure to pass either motion would likely necessitate requesting an Article 50 extension, with Saturday also being the deadline for requesting a delay set out in the Benn Act aimed at preventing a no deal Brexit. The EU seem reluctant to agree a further delay to the process, with Commission President Juncker yesterday stating there was no need for "prolongation". Taking this all into account, sterling is incredibly likely to gap significantly higher, or lower, at the Asia open on Sunday evening, depending on the course of events over the weekend.

Elsewhere, no notable economic data releases are due on Friday from across G10 FX, though a number of central bank speakers will be of interest. Market participants will parse remarks from Fed Vice Chair Clarida, along with regional Fed Presidents Kaplan and George, for any hints on the policy outlook. Meanwhile, BoE Governor Carney, BoE Deputy Governor Cunliffe, and BoC Deputy Governor Lane are also set to speak.

Looking ahead to next week, the data calendar is relatively light, meaning geopolitics is set to continue dominating. While focus will remain on Brexit and US-China trade relations, Monday's Canadian federal elections are also worth highlighting, with the poll likely to result in a hung parliament. Such an outcome, and resulting uncertainties as parties try to form a coalition, may weigh on the loonie. Meanwhile, the main economic event of the week will be Thursday's ECB policy decision, President Draghi's final meeting before handing over to Christine Lagarde. No policy changes are expected, with the decision and post-meeting press conference likely to be a farewell to the man who saved the euro.

Today's Economic Calendar

Time Currency Release Consensus Previous
No notable releases