Since May, the long-distanced Brexit situation has taken a sharp turn for the worse again. Prime Minister Theresa May 2 is likely to enter the countdown, and the Brexit candidates among the successor candidates are eyeing it. The performance of the pound is as cool as the cold winter weather in the British four islands.
Bank of the US predicted in a research report released a few days ago that in the face of the continued weakening of the pound, the Bank of England may not sit idly by. Just as the sharp increase in foreign exchange reserves in the fourth quarter of last year, it may interfere in the market to maintain exchange rate stability if necessary.
pounds/euro suddenly appeared ten consecutive negative
On April 10 this year, the EU held an emergency summit, and the leaders of 27 countries agreed to the UK postpone Brexit until the end of October, temporarily avoiding the situation of the UK's no-deal Brexit. European Council President Tusk said at the time that this would provide enough time for the UK to find the best Brexit plan and that the course of action would be fully in the hands of the UK.
However, the optimistic sentiment at that time was being broken by reality. In the next six weeks, the ruling party Conservative party and Labour party have always been difficult to make substantial breakthroughs in the negotiations on the Brexit agreement, especially on issues such as the Customs Union and the Second Referendum. Finally, on May 17, Labor Leader Corbyn officially announced that the negotiations had reached the limits that could be done, and Labor would oppose the government's proposal for Brexit, which also means that the negotiations between Labor and the Conservative Party were officially broken.
According to the government's previous plan, the lower house of the British Parliament will vote for the fourth vote on the draft Brexit agreement in early June. Labour's attitude means that the possibility of the draft being passed is slim. At the same time, the Brexit faction within the Conservative Party has launched a "forced palace" against May, threatening to launch a vote of distrust. After meeting with members of the Conservative MP group "1922 Committee", Theresa May announced that she would announce her departure timeline after the vote on the draft Brexit agreement, regardless of the final vote. Currently, former British Foreign Secretary Boris Johnson , British International Development Secretary Stuart, former Employment and Pension Secretary McVay and many others have publicly announced that they will participate in the Conservative Party’s leadership struggle.
The deterioration of the prospects for Brexit and the risk of the Prime Minister's resignation has put the pound in a storm. As of May 17, the pound/euro has fallen for 10 consecutive days, setting the longest record since December 2000. The pound/user fell 2.2% this week, approaching the 1.27 mark, just one step away from the low at the beginning of the year. Risk aversion sentiment also pushed up the price of UK Treasury bonds, with the 10-year Treasury yield hitting a low of 1.008%, a new low since early April.
RBC Capital Markets chief currency strategist Adam Cole said that it can be seen that market pricing is moving towards a no-deal Brexit, and the new version of the government's Brexit agreement will not be passed in parliament, and May is expected to step down before the British Parliament summer break in July.
At the same time, the Conservative Party will also face the dilemma of losing votes in next week's European Parliament elections. The latest poll shows that the Brexit party, led by former British Independence Party (UKIP) leader Farage , is expected to win 34% of the domestic vote, which even exceeds the Tory and Labor combined.
FASIC foreign exchange strategist Kenneth Broux believes that the results of the European Parliament will show that (if May resigns) the Brexitists are likely to win in the future British Prime Minister competition. Among all the current candidates, the big hit Johnson is undoubtedly the strongest supporter of Brexit. If he is finally elected, the pound/dollar is likely to quickly fall to 1.20.
Bank of America: Bank of England may interfere with the market
According to International Monetary Fund (IMF) data on central bank monetary reserve indicators, the total foreign exchange reserves in the UK in the fourth quarter of 2018 were US$146 billion, an increase of US$23 billion from the previous quarter.
Bank U.S. strategist Sebastien Cross and others pointed out in the latest research report that the Bank of England's foreign exchange reserves increased by nearly one-fifth in the fourth quarter of last year, setting a record high since 2000. Among them, the transaction volume of the currency repurchase agreement is abnormally high, and the scale of the euro in the Ministry of Finance's "Exchange Equalisation Account" increased significantly.Analysts believe that the Bank of England's move is to deal with risk events before the arrival of the Brexit deadline at the end of March, providing liquidity to banks through currency swap agreements to prevent excessive fluctuations in the pound exchange rate. Now as the pound continues to depreciate, the Bank of England may increase its holdings of foreign exchange such as the euro again and interfere with the market as appropriate.
The pound has been like a roller coaster this year. The pound/USD has appreciated nearly 3% in the first two months, becoming the best performing currency in the G10. However, in the next three months, the pound has returned to its starting point. Even if the Bank of England talked about the expectation of interest rate hikes at its May interest rate meeting, it is hard to compete with investors' concerns about the potential risks of disorderly Brexit.
Kroos expects that if the UK eventually leaves the EU without a deal, the pound/USD will fall nearly 15% to around 1.10, which will cause the UK's current account deficit to worsen and threaten the UK's reserve currency status. Currently, the British pound accounts for nearly US$500 billion in the monetary reserves of global central banks. "As the new Brexit deadline approaches at the end of October, the UK's move to buy foreign exchange in the open market will likely repeat itself."
A spokesman for the UK Ministry of Finance later said that the UK government will not comment on actions not yet taken, but added, "The orderly operation of the foreign exchange market is crucial to economic development and we will always strive to maintain this."
