GBP: May ‘backs down’ on parliament’s involvement in Brexit - MUFG

Derek Halpenny, European Head of GMR at MUFG, notes that after plunging to an intra-day low of 1.2090 versus the dollar in trading yesterday, the pound has rebounded sharply in Asian trading today on the news that PM Theresa May has decided to allow consultation with parliament over Brexit negotiations going forward.

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“But does the surge of the pound reflect the significance of this development or merely the increasing risks of running speculative short pound positions in an increasingly volatile market as the pound weakens to more extreme levels?

Our initial thought would be to lean toward the latter explanation for the surge of the pound. PM May appears to have relented in the face of the potential for the Labour Party’s motion to succeed. That motion reads : “That this house recognises that leaving the EU is the defining issue facing the UK; believes that there should be a full and transparent debate on the Government’s plan for leaving the EU; and calls on the Prime Minister to ensure that this House is able properly  to scrutinise that plan for leaving the EU before Article 50 is invoked”. PM May last night then added an amendment to that motion citing that this process should be undertaken in a way that respects the will of the majority of the people of the UK reflected in the referendum vote and in a way that does not undermine the negotiating position of the Government “as negotiations are entered into which will take place after Article 50 has been triggered”.

So what does all that mean? Well with the amendment from PM May and in particular emphasising that parliamentary involvement must not undermine the government’s position in negotiations gives the government a lot of wiggle room in honouring the motion. What will there be to scrutinise ahead of triggering Article 50 and entering negotiations with the EU? There is no commitment to a vote in this motion and it of course says nothing on the decision process of actually triggering Article 50. So this “climb-down” looks more like political manoeuvring to us rather than something notably significant.

Of course, market participants may view this as an indication of how future inevitable conflicts may end with parliamentary power trumping PM May’s attempts to move the process forward more quickly without the complications of involving a parliament that is pro-EU. That could have an influence on changing perceptions on ‘Hard’ Brexit. The timing of invoking Article 50 remains much more important and if court approval is granted to the government to proceed independent of parliament in court hearings tomorrow and on Monday, the pound may come under renewed selling pressure again.”