Pound wallows as govt plans vote on Withdrawal Agreement

The pound sank to its lowest point in the week on Thursday as investors and analysts struggled to see a clear way forward for Brexit after a confusing night in Westminster and as the government planned a new vote on Friday.

Sterling was down 0.6% versus the dollar at 1.3113 and 0.45% against the euro to 1.1678 at 1330 GMT in London on Thursday.

Leader of the House, Andrea Leadsom, said that MPs will debate Theresa May's Brexit deal on Friday, with reports suggesting that there will be a Commons vote on the Withdrawal Agreement element of the deal rather than a third meaningful vote.

This came a day after May offered to step down as Prime Minister if Conservative MPs supported her Brexit deal in a third meaningful vote.

This seemed to win over the likes of leadership-hungry Boris Johnson and many but not all Brexiters in the ERG, with Downing Street thought to be eyeing the WA vote as a means of bypass procedural restrictions set out by the House of Commons speaker John Bercow.

Also on Thursday, MPs were mulling over alternative ways forward for Brexit, after the first phase of indicative votes were held to look for alternative solutions, including revoking Article 50, a Norway-plus deal, no-deal Brexit and a managed no-deal.

None of the eight options emerged with a positive majority. The two options with the most Commons support were a confirmatory second referendum, with 268 voting for and 295 against, and a plan for the government to negotiate a “permanent and comprehensive UK-wide customs union with the EU” that received 264 votes of support but 272 against. This compared to the 242 votes and 391 against the May's deal in the second meaningful vote on 12 March.

The lack of a clear winner had been predicted, with MPs voting earlier on Wednesday to take control of parliamentary business again on Monday, when they could vote on a narrowed-down list of options on alternative ways forward for Brexit, possibly by means of ranked preference voting.

WAY FORWARD REMAINS UNCLEAR

Goldman Sachs said the results of the experimental phase of indicative votes "were not unexpected" and felt three observations are critical, including that the votes are only indicative and would be subject to government acceptance and further EU negotiation.

"First, the options that attracted the most support this evening necessitate only minimal changes to the legally binding Withdrawal Agreement already negotiated between the UK and the EU. If the government were to support membership of a 'permanent customs union', for example, most of the required modifications would be confined to the non-binding Political Declaration on the future relationship between the UK and the EU."

Finally, this phase only marked the beginning of the process of parliamentary exploration ─ with the objective of the second stage to elucidate a unique representation of the collective will of the House of Commons.

"We think the outcome of that concluding phase is likely to emphasise support for soft Brexit end-states while undermining support for more abrupt versions of near-term exit."

Goldman also felt the government will be able to work around any of the Speaker's procedural impediments to a third vote and maintained its view that the most likely outcome is delayed ratification of the current Withdrawal Agreement.

UBS observed that a number of MPs have declared they are prepared to change their previous votes and back the deal in the third meaningful vote, "but a victory for the prime minister looks far from assured".

Until some clarity emerges, UBS economists recommended clients to not take directional views in sterling: "Sterling remains in the crosshairs and is susceptible to volatility as each stage of the increasingly protracted Brexit process unfolds. We believe it is prudent to tread cautiously while the news is fast flowing. We do not advocate taking directional views on the currency, but we remain alert to entry and exit opportunities if persistent volatility results in disproportionately large moves. For the time being, the most sensible approach seems to be to hedge sterling's downside risks."

Noting that the GBPUS had been pushed to its lowest levels of the week, analysts at Rabobank pointed out that it was still above last week’s lows.

"While the threat of a no-deal Brexit still looms large, it is possible that over the next few days some clarity will have emerged over whether new life can be breathed into PM May’s Withdrawal Agreement or whether instead MPs will attempt instead to consider negotiating a new customs union with the EU," Rabobank said.

"On either of these options, GBP is likely to benefit from a relief rally, with a new customs unions likely garnering a bigger reaction eventually."