Brexit and beyond: Oliver Mangan, Chief Economist, AIB

Address by Oliver Mangan, Chief Economist, AIB

Friday, 17 November, Dublin

Given the considerable uncertainty over whether the UK parliament will approve the withdrawal agreement and with a range of outcomes now possible in relation to Brexit, sterling is entering a period of increased volatility.

We got an example of this last week when news broke of the UK Brexit secretary’s resignation.

Within minutes, sterling fell by over 1.5% on the exchanges.

It will be very difficult for British prime minister Theresa May to be able to get the agreement through parliament, given the strong opposition to the deal from sections of her own party.

History is interesting in this regard.

The UK joined the EU in 1973, or the EEC as its was back then, on the back of a parliamentary vote, not a referendum.

However, as now, the then Tory prime minister Ted Heath faced strong opposition from within his own party to EU membership, with a significant number of Conservative MPs voting against it.

The vote was only carried when 69 Labour MPs defied their party leader and crossed the floor to vote with Heath’s government in support of membership.

We doubt that Ms May will be able to rely on such support from the opposition benches on this occasion.

There is a real risk that we could be entering a parliamentary logjam in the UK whereby no Brexit option — the withdrawal agreement, no-deal, or remain — can command a majority support.

Two options would seem to arise in the event of such a logjam: Request the EU to push out the date for Brexit by a number of months and/or go back to the people for what would be a third vote on EU membership since the UK joined in 1973.

Ultimately then, if the politicians can’t agree on a way forward, the matter may have to go back to the people.

Other developments are also possible.

Parliament could ask the UK government to go back to Brussels and try to get a better deal.

There could be a change of leadership in the Conservative party or a UK general election.

All of these involve huge uncertainty and would result in a very volatile backdrop for sterling in the weeks ahead, with big moves possible in either direction.

From a currency viewpoint, if market fears over a no-deal hard Brexit outcome were to escalate, euro against sterling is likely to break out of its 87p to 91p trading range of the past year.

It could rise up towards the 93p level which it hit in summer 2017.

Or, it could reach the 95p mark that was last seen in 2009.

Even if the UK leaves with a deal, it may not be clear what the longterm EU-UK trading relationship will be for a number of years.

As a result, the upside for sterling may be limited and euro-sterling may move down to 85p to 86p in such circumstances.

What has been lost sight of in recent days, though, is that the probability of the UK staying in the EU has risen, given that the matter could yet go to another referendum.

Sterling should make significant gains if the UK remains in the EU.

The euro against sterling could move back down towards the 80p level in such a scenario, especially with UK interest rates likely to rise.

(Reporting by the Irish Examiner)

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