Currency Corner: what does Boris Johnson’s Brexit deal mean for the pound?

In today's Currency Corner, Dominic Frisby looks at what Boris Johnson's potential Brexit deal with the EU could mean for sterling.

£50 notes on an EU flag © Omar Marques/SOPA Images/LightRocket via Getty Images

It was a long time coming, but it looks like we might finally have a deal by which Britain can leave the European Union. What does it all mean for sterling?

The implications are good, of course. That's why sterling has had such a rally this past week, from $1.21 to $1.29. I would not have liked to have been short.

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We have been saying on these pages since shortly after the dawn of time, or thereabouts, that sterling is significantly undervalued, but that it won't make its big move back to fair value until Brexit is resolved. It has been held back by political, not economic forces.

So now we have to ask ourselves is this it? Is Johnson's deal going to be how we leave? We should know the answer to that tomorrow, when Parliament votes.

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My hunch is that Johnson will get his deal through. The so-called Spartans will come on board; many of the "anti-no-deal" Tories, such as Philip Hammond and David Gauke, will come on board as well, perhaps only because it improves their chances of being re-admitted into the Conservative Party; and 20 or 30 Labour MPs in leave-voting constituencies, who feel more obligation to their constituents than they do to the Labour leadership, will vote with the government as well.

I gather that Labour MPs will not lose the whip if they vote the deal through. The Labour leadership might actually want that, secretly. Brexit has probably been more damaging to Labour than to the Conservatives. Labour might want it over Jeremy Corbyn is a closet Brexiteer after all.

But the vote could quite easily go the other way. Those Tories who had the whip removed might not think they're ever going to get it back, or they might want revenge. Anti-Brexit fervour may be so entrenched in some that they won't let themselves vote with the government, no matter what.

Labour MPs might not be able to bring themselves to vote with Boris Johnson; some might even abstain.

There's a chance that some amendment will get sneaked in at the last minute that sabotages the process.

These are all possibilities. But my hunch is that Johnson's deal will get through. I can feel it in my bones.

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You will have your own views, of course, and it's the multitude of different views that makes a market. The price then shows who was right.

With a move in sterling such as we have seen this week, you would normally expect a retracement. In the short term, we might see a shallow one, even if Johnson's deal gets through. But it is more likely that the market might prove so grateful for some political certainty after all this time that this rally continues. Longer term, I am bullish.

If Johnson's deal doesn't get through, then "no deal" is back on the table. Sterling won't like that, at least not at first. (It might eventually come round to the idea with the certainty of WTO rules.) If Johnson's deal fails, the reaction will most likely be a sterling sell-off.

And then we will be back in forex limbo and political limbo, too. The squabble will go on.

So the outlook for sterling all hinges on Saturday.

Technically, the forex markets will still be open, at least to central banks and related VIPs. But they will not be open to ordinary retail traders, which makes for an interesting situation.

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It means there is a possibility of a large gap up or down on Sunday, depending on Saturday's outcome. Use of stops will become complicated to say the least. Needless to say, there is a lot of risk. Caveat emptor.

In the longer term, I think sterling will go up. It's undervalued on a purchasing power parity basis. It will return to fair value and perhaps even exceed it but that can't happen until this stage of Brexit is resolved (we will still need to negotiate the future trade deal).

That's when Frisby's Flux comes into play: my eight-year cycle in the pound. I've covered it before and I'll cover it again next week.

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