What does Parliament's suspension mean for GBP?

Summary:

• Outrage as UK PM shuts down parliament to protect Brexit plan

• Boris announced shutdown will run till 14th October

• GBP drops in response but recovers off the lows

Wednesday was a turbulent day for UK politics, even against the country’s own lofty standards as PM Boris Johnson caused outrage by announcing plans to shut down parliament for five weeks. The act of proroguing, or suspending, parliament is common and occurs regularly to mark the end of a session but the timing of this decision is conspicuous to say the least. Despite the fact that the current session is the longest in over 400 years, the move from the PM is clearly a political play and essentially an act of throwing down the gauntlet and daring opponents to vote down the government.

The pound fell by around 130 pips, or more than 1%, in the initial response to the news, but it is worth noting that there’s not been further downside since. Source: xStation 

Despite the furore, the decision is within the constitutional rights of the UK and has been accepted by the Queen. Having said that, the controversy comes in that it effectively shortens the time horizon that opponents have to move against the PM before the current Brexit deadline. 

The following is a timeline of key dates to watch going forward:

9th September: Parliament suspended

14th October: Queens speech to mark the start of the new parliamentary session

17th October: EU leaders summit

31st October: Brexit deadline 

Options to avert no-deal Brexit 

The two options from the opposition to avert a no deal Brexit - a vote of no confidence in the government and passing a bill to outlaw it - are still both on the table, but after the recent developments time is now very much of the essence. Labour have been cautious to call a vote of no confidence despite the government having a majority of just 1, as they fear a failure in being successful would only serve to further embolden the PM’s position. This would also require Tory MPs to vote against their party - akin to Turkey’s voting for Christmas. A vote of no confidence was held in January 2019, with the government led by then-PM Theresa May surviving by a margin of 19 (325-306). Reports earlier this week suggested that Labor were leaning towards passing a bill to prevent a no-deal Brexit - similar to the Cooper-Letwin amendment which passed in early April and prevented May’s government from delivering a no-deal Brexit.  

A further issue is that even if a vote of no-confidence succeeds or a bill passes through the house of commons to prevent no-deal, this doesn’t guarantee it will be averted. While the decision by the PM to take a longer than conventional break between parliamentary sessions - it is in fact scheduled to be the longest since the Second World War - is within the constitution it is clearly probing the edges and some see this as a sign that, if forced, Boris Johnson would go even further. “If MPs pass a no-confidence vote next week, then we won’t resign,” said a government insider. “We won’t recommend another government. We’ll dissolve parliament [and] call an election between November 1 and 5.” Finally, it is worth noting that even if these steps are passed any extension to the current Brexit deadline requires the EU27 to agree - something which is far from a given.  

What does it all mean for GBP?

As is often the case with Brexit, there’s lots of moving parts here and attempting to outline every individual outcome is unnecessarily complicated. The simple fact remains that the threat of a no-deal remains large and is likely to stay that way for the foreseeable future. Recent developments don’t really materially change the chances of this scenario playing out, but they have certainly focused minds and applied pressure on the opposition to get their act together pretty swiftly if they want to be anything more than interested observers going forward. It is perhaps telling that after the knee-jerk move lower as the news dropped there was a lack of follow through to the downside for the pound and it’s becoming ever more apparent that a fair bit of bad news is already priced-in to the currency.

Yesterday a bearish engulfing printed candle printed on D1, although it should be also noted that there’s a sizable wick below. The day’s range from 1.2155-1.2290 provides levels to watch near term. Longer term the lows around 1.2015 are very near to the lowest level since 1985 and may be seen as key support that needs to hold for any recovery to take hold. Source: xStation