Currency specialists see sterling appreciating despite Brexit jitters

Irish currency specialists believe the risk of a no-deal Brexit – the worst case scenario – has receded in recent months and that sterling is now more likely to appreciate against the euro.

While not ruling out more volatility in and around Tuesday’s crunch Brexit vote in the House of Commons, specialists believe the British parliament is exerting more control on the process to dampen the risk of a no-deal outcome.

“Despite the talk in some quarters that Britain could exit the EU on March 29th without a deal, the market doesn’t seem to believe it,” Merrion analyst Alan McQuaid said, pointing to forecasts that imply the probability of a no-deal Brexit has fallen.

“[Theresa] May looks likely to lose the vote in parliament tomorrow, so what happens after that is anybody’s guess, with all options (extending Article 50, a general election, another referendum, hard Brexit, soft Brexit, etc) still on the table,” he said.

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“We are ruling out a hard Brexit here as a majority of UK politicians are opposed to that,” he said.

“ So on the basis that whatever the eventual outcome is, it won’t be a hard Brexit, then the outlook for sterling should be positive.”

Whatever about near-term volatility, he predicted the pound would appreciate in the coming months, and is more likely to be trading closer to 80p than 90p to the euro come year-end.

Currently sterling is trading at 89p against the euro. While the Brexit-induced weakness in sterling has hurt exporters in Ireland, the headline trade numbers have remained strong.

With the Brexit outcome still uncertain, British MPs are expected to vote on Tuesday against a Brexit agreement prime minister Theresa May struck with the EU in November.

Her government suffered several defeats last week when MPs who oppose leaving the EU without a deal won a vote effectively creating new obstacles to a no-deal Brexit.

Goodbody analyst Dermot O’Leary expressed surprise at how little sterling had moved in the past week given the political events.

He predicted a short-term bounce for the UK currency if the House of Commons “moves to ensure no-deal scenario is avoided”.

Investec’s head of foreign exchange Mark O’Brien said the risk of a no-deal or a hard Brexit was now as low as five to 10 per cent with “parliament exerting more control of the process”.

While Mrs May was unlikely to win Tuesday’s vote, he did not rule out the prospect of her winning support for a deal at a later stage, noting she had converted more MPs to her cause at the weekend.

Mr O'Brien said Investec was predicting that sterling would appreciate to 84-85p against the euro in the event of the UK exiting with a deal.

He also raised the prospect of article 50 – the UK’s exit mechanism – being extended beyond the March 29th deadline.

Minister of State for Department of Finance Michael D'Arcy echoed market sentiment, saying he did not believe there would be a no-deal Brexit.

"While it looks uncontrolled and it is very uncertain right now... I think there are enough checks and balances within the system," he told Bloomberg News.

“The one thing that is coming across is that there seems to be a majority in the House of Commons for one single thing: that no-deal Brexit will not be allowed,” he said.

On the backstop issue – the agreement to avoid a hard Border in Ireland – Mr D’Arcy said it would only be invoked if a trade deal was not reached and this was “inconceivable”.

“Everybody says they want a trade deal, why then would the circumstance arise that one wasn’t achieved,” he said.