Sterling wobbles ahead of crunch Brexit week as Barnier offers backstop assurance

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Sterling fell against both the euro and the dollar but investors still bet that the likeliest outcome of a series of UK parliamentary votes next week is that the Brexit process will be extended.

The UK currency fell 0.4% against the dollar and was down almost 1% against the euro, to 86.23 pence, amid jitters on votes starting Tuesday on UK Prime Minister Theresa May’s withdrawal deal.

The moves came as the EU’s chief Brexit negotiator Michel Barnier said it was ready to offer Britain a unilateral exit from the customs union while maintaining the other elements of the Irish backstop.

Since late last month when Ms May conceded the Commons would have a say on Brexit, markets have signalled they believe the British government will be forced to take a no-deal Brexit off the table.

They point to the remarkable trading performance of sterling which has held steady despite the countdown to the crunch votes.

Many analysts on this side of the Irish Sea say that little has changed in recent weeks and that the most likely outcome of the series of votes by MPs will be that the British government will decommission its threat to crash out of the EU at the end of March. MPs potentially are due to take three votes over three successive days.

Nonetheless, there were some jitters on Friday as the parliamentary votes draw closer. Alan McQuaid, economist at Cantor Fitzgerald, said he believed there will be an extension to the Article 50 process which Ms May’s government triggered two years ago but that there was still a lot of uncertainty “in the air”.

He said he expected in the longer term that sterling would rise if a hard Brexit were avoided under a subsequent full trading deal between the EU and the UK because the Bank of England would likely increase interest rates and boost the value of the currency.

Davy chief economist Conall Mac Coille said that sterling was signalling that the risks of a no-deal had subsided and that the likeliest outcome would be for the UK to seek to buy time to leave the EU at a later date. “The debate has to be about for how long the extension will be,” said Mr Mac Coille.

Meanwhile, Irish shares have yet to benefit from the diminished risks that Britain will crash out of the EU.

Bank of Ireland — which is the most exposed of the Irish lenders to earnings from the UK — fell almost 2% and are down almost 25% in the past year. AIB were little changed but are down almost 24% in the year, and Permanent TSB shares were steady but have lost 29% in the last 52 weeks.

Chris Beauchamp, chief market analyst at online broker IG, said that political progress on any new Brexit deal appeared “minimal”.

“At this late stage, it is almost too late for anything bar no-deal, and in the end we might just see the deadline quietly ignored in a bid to avoid a major breakdown,” he said, on next week’s votes by MPs in the Commons.

Ruth Gregory, chief UK economist at Capital Markets in London, said the looming votes marked “the biggest week for Brexit since the 2016 EU referendum” and would likely “give us some steer on where the UK is headed”.

She said: “So by the end of next week, we should know if the UK is heading for a no-deal Brexit, a deal on March 29, or a delay. The latter two would be positive for the pound. Which way policymakers lurch is anybody’s guess.”

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