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Brexit Briefing: Pound Struggles for Direction As Parliament Prepares for Ping-Pong

Brexit Briefing: Pound Struggles for Direction As Parliament Prepares for Ping-Pong

2017-02-21 16:23:00
Oliver Morrison, Analyst
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Talking Points:

  • Sterling struggling for direction as Carney maintains policy of looking through higher inflation.
  • But he says Brexit process could be a smooth one after all.
  • Sterling could remain volatile as the House of Lords debates the Brexit bill.
  • See the DailyFX Economic Calendar and see what live coverage for key event risk impacting FX markets is scheduled for the week on the DailyFX Webinar Calendar.

The British Pound has struggled for traction Tuesday after mixed messages from Bank of England Governor Mark Carney. Carney told Parliament that the Brexit process could be “smooth” after all, which could lead to a faster rate of interest rate rises.

If the UK’s Brexit process moves “relatively smoothly to an increasingly clear end point” it would “be consistent with a higher path of interest rates,” he said, in testimony to members of the Treasury select committee.

He said that if the UK gets a “bold, ambitious trade deal” with the EU without significant obstacles “that is a scenario that is consistent with faster growth relative to forecast, higher inflationary pressure relative to forecast and tighter monetary policy relative to forecast.”

Any evidence of a smooth Brexit and hawkish BoE is positive for Pound bulls of course. But Carney then dampened expectations of a rate rise, stressing that the inflation overshoot in January was “entirely” due to Pound weakness and not stronger growth. This ties with the UK’s uninspiring data last week. The Bank will therefore continue “looking through” higher inflation until evidence of growing domestic inflationary pressures.

The British Pound has risen versus the Euro and Yen Tuesday, but it remains weighted by Dollar strength, despite the Greenback dipping slightly on weaker-than-expected manufacturing and services data, after two Fed policymakers voiced support for rate hikes.

Up ahead, Sterling could remain volatile as the House of Lords debates the Brexit bill. This could, in theory at least, result in a political upset for the government. Crucially, peers are not expected to want to be seen frustrating the referendum result and defying ‘the will of the people’. Sterling traders should be more concerned with the amendments that peers are expected to make and whether they will cause the passage of the Brexit bill to be delayed – see timeline below.

Peers may vote in favour of amendments on the rights of EU citizens living in Britain, and they may call for the government to give parliament a vote on the final Brexit deal. But Lady Smith, the shadow leader in the Lords, has promised there will be no ‘extended ping pong’, with amendments being passed back and forth between the houses should the Commons rejects the peers’ amendments.

Brexit bill timeline:

Feb. 20-21

Members of the House of Lords hold a two-day debate on the bill. Peers can raise concerns about possible amendments, although they won’t be voted on at this stage.

Feb. 27 and March 1

This the committee stage when proposed amendments are discussed in more detail.

March 7

The peers debate the final wording of the bill and vote on any possible amendments. These amendments go back to the House of Commons for its approval. The bill is passed back from house to house – the so-called ‘ping-pong’ period until they both agree on the details of the bill.

There is no exact timeline for this, though the Lords expects to send the bill to the Commons for the final time on the week of March 13. The government has said it expects to trigger the Article 50 formal departure by the end of March.

Markets

Index / Exchange Rate

Change (Exchange Hours/GMT Session Rollover)

Market Close/Last

FTSE 100

-0.24%

7,282

DAX

+1.24%

11,973.75

GBP/USD

0.000%

1.2460

EUR/USD

-0.78%

1.0528

EUR/GBP

-0.82%

0.8450

Events

Date, Time (GMT)

Forecast

Previous

UK Gross Domestic Product (YoY) (4Q P)

Feb 22, 0930

2.2%

2.2%

German IfO report, business climate

Feb 22, 0900

109.6

109.8

UK CBI retail report

Feb 23, 1100

2

-8

UK BBA loans for house purchase (Jan)

Feb 24, 0930

42600

43228

--- Written by Oliver Morrison, Analyst

To contact Oliver, email him at oliver.morrison@ig.com

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