Pound drops as political uncertainty weighs
Sterling has lost ground today as political uncertainty ramps up with Johnson suspending parliament and increading odds of a snap general election.
Last week, Boris Johnson announced plans to suspend Parliament for over 4-weeks from early September which was later authorised by the Queen. This has been met with fury by many MPs who are only returning back from summer recess tomorrow. Whilst Boris refutes that he was trying to prevent parliament from blocking his Brexit plans, this suspension means that MPs will have an extremely limited time to pass any new legislation to prevent a disorderly exit from the EU on the 31st October. Therefore, although some would argue that this is the best way of achieving a deal with the EU before the 31st Oct deadline, this has increased the risks of a no-deal Brexit and continues to keep the pound under pressure.
Parliament will still try to act as quickly as it can this week to try and prevent a no-deal exit. There are two options to do this… one through new legislation or secondly through a vote of no-confidence in the government. Passing new legislation will likely be the first route but this will be very challenging with the time available. Current reports indicate that the main attempt will be to pass a law to extend Article 50 by another three months in a bid to allow more time to get a deal sorted.
If new legislation fails, then numerous Tory MPs have said that they would be prepared to vote against their own party to bring down the current government to help avoid a no-deal. Boris has increased pressure on these Tory rebels by saying that they will be kicked out of the party if they vote against him. With a working majority of only one MP, Boris would need the help of rebel Labour Brexiteers to help maintain his current strategy. If Boris’s plans are scuppered this week, then it is likely that he will call a snap election to be held before the October deadline. These rumours have been growing all day which is creating further political uncertainty and reducing the amount of time available before the Oct 31st deadline.
As it stands, the UK political uncertainty is possibly the highest it has been since the whole Brexit saga began and traders are bracing for more big swings in the Pound over the coming weeks (volatility levels hit their highest levels for year). As a result, the GBP/USD dropped nearly 2-cents from Friday’s high and the GBP/EUR lost around 1-cent from Friday. Watch this space as this week could be an interesting one.