Sterling rose against the dollar on Wednesday as markets digested the draft Brexit agreement struck between Britain and the EU, and whether prime minister Theresa May could sell the deal to her cabinet colleagues and the wider Tory party.
However, markets are also nervous about future hurdles, including when the UK parliament is likely to vote on the issue and how the Brxiteer wing of the Conservatives will react to the draft agreement.
Sterling had jumped on Tuesday on news of the draft deal, but fell back on Wednesday morning before rising slightly, reflecting the markets uncertainty on where its current volatility will end up.
Against the euro sterling has risen from 89p on October 30th to a high of 86.6p at one stage on Wednesday, partly amid hopes of a Brexit deal breakthrough.
Justin Doyle, a senior foreign exchange trader with Investec in Dublin, said that sterling may rise to 85p in the very near term, providing a boost to Irish exporters. However, securing backing from the UK parliament for an Brexit deal may be difficult for Ms May, which may prompt renewed sterling volatility over the next month.
“She has a lot of work to do to get it through parliament, and a rejection there will be seen as a no-deal scenario and will probably see her stand down as prime minister.”
The volatility and uncertainty is also reflected in London. “Unless you have to take a position on sterling, you don’t, unless you are foolish,” said Paul Lambert, a currencies investor at Insight Investment in London. “We have decided it is better to just watch.”
Like other investors, Mr Lambert thinks there is likely to be a 5 per cent gain in store for sterling in the event that the current deal progresses, with further gains ahead if the final outcome resembles membership of the European Economic Area and if the Bank of England takes that as a cue to raise interest rates, potentially multiple times.
First hurdles
Equally, however, he believes the currency could drop 5 per cent now if the deal fails to pass the first hurdles, and fall an additional 15 per cent in the event the UK leaves the EU with no deal at all.
“Speculators take risks when they have an edge, when they think they know the outcome,” he said. In this case no one does, leaving the market in limbo.
Ibec, the Irish business lobby group, welcomed the progress in the Brexit negotiations but said it was mindful that hurdles remained.
Ibec CEO Danny McCoy said: “Business needs urgent clarity on the terms of the UK’s exit. A ‘no-deal’ cliff edge must be avoided. A draft withdrawal agreement moves the debate on and, if ratified, will lead to an orderly Brexit with a transition period.
“An agreement that potentially keeps all of the UK aligned to the EU customs union will help minimise disruption to business. However, big political hurdles remain. ”
