Sterling could jump 8% if Brexit deal gets approved by UK Parliament, experts say
- Analysts told CNBC that the currency could hit anywhere between $1.35-$1.40 if the deal gets passed through the U.K. parliament.
- On Tuesday, Britain and the EU reportedly agreed to a draft of Brexit divorce terms. British Prime Minister Theresa May will meet with her cabinet on Wednesday to get her ministers on her side before presenting the deal to the Parliament.
With the U.K. and the European Union agreeing on a draft agreement for Brexit, traders are now contemplating what could happen to sterling.
The currency has been under a lot of pressure lately owing to the uncertainty surrounding a Brexit agreement. But analysts told CNBC that the currency could hit anywhere between $1.35 and $1.40 if the deal gets passed through the U.K. Parliament. It was trading at $1.2953 at around 1:00 p.m. London time on Wednesday.
On Tuesday, Britain and the EU reportedly agreed to a draft of Brexit divorce terms. British Prime Minister Theresa May will meet with her Cabinet (her close circle of lawmakers) on Wednesday to get her ministers on side before presenting the deal to Parliament.
"Assuming the deal is accepted by the Cabinet today (Wednesday), I would think cable can reach $1.32, $1.34 by the end of the week," Peter Chatwell, a rates strategist at Mizuho, told CNBC via email.
Chatwell further explained that while the U.K.-EU Brexit negotiations remain tense, he expects the Cabinet to back to Brexit deal but getting it passed through Parliament is "doubtful."
"We are very doubtful whether the Conservative minority government will be able to pass the deal through Parliament, with an early general election being a significant risk." In a situation like that, Chatwell expects sterling to slip back down toward $1.25 by year-end.
Wait and watch
May reportedly showed members of her Cabinet the draft deal, which is believed to stretch to more than 500 pages, late Tuesday evening. She wants their support ahead of a crunch meeting with these ministers on Wednesday.
We do not know at this stage when and what details of the draft agreement will be made available, although media reports have suggested the draft agreement focuses a lot on new proposals over the Irish border and an arrangement to keep the U.K. within the EU 's customs union after Brexit for a certain amount of time. The customs union is the arrangement by which EU members apply the same tariffs to products imported from the rest of the world.
"We remain of the view that risks are underpriced. Should the DUP (the Northern Irish Democratic Unionist Party that aids May's party in power) oppose the agreement, and assuming that at least 20 Conservative MPs oppose the deal, it will require 22 Labour MPs to vote with the government to secure agreement — a difficult task in our view," Oliver Harvey, macro strategist at Deutsche Bank, warned in a note to clients on Tuesday.
However, if the draft deal sees a parliamentary passage, sterling will see a massive rally, analysts told CNBC.
"We're basically in an environment now where FX (foreign exchange) investors will most likely be looking to fade instances of GBP strength until parliamentary passage is assured," Stephen Gallo, European head of forex strategy at Bank of Montreal, told CNBC via email.
"Parliamentary passage should yield $1.35 to $1.36 in GBP/USD, all things considered, including the current strong environment for the USD."
Next steps
Sterling is still down by over 10 percent since the U.K. voted to leave the European Union in June 2016. The process to leave the bloc has proven long and rich in technical details. The departure date has been scheduled for March 29 next year — meaning that negotiators have just over four months to conclude negotiations on aspects such as the movement of people and goods across the border between Northern Ireland and the Republic of Ireland.
Despite the draft deal this week, there are a number of steps ahead and each step could impact the trade in sterling. Jordan Rochester, an global fx strategist at Nomura, said in a client note Tuesday that sterling will go up to $1.3250 if the cabinet is on board with May. The next step, as he says, will be to deal with potential resignations which could be a "headache for GBP."
But if sterling is able to get through Parliament, Rochester expects "we'll be in a $1.35 to $1.40 range when it is passed by year-end."
The next step, Rochester said, will be figuring out what the Bank of England will do in 2019. "Hikes will be in the pipeline, just a matter of timing." In this case, sterling will rally to $1.50 levels by end-2019, he added.
Sterling fell 0.4 percent on Wednesday to trade at $1.2927, a move traders attributed to a Telegraph newspaper reporter saying that the British attorney general had raised significant concerns about the customs union backstop review mechanism, Reuters reported. The currency later pared its losses to trade at $1.2962. On Tuesday, sterling posted its biggest jump in two weeks after it rallied more than 1 percent to $1.3047.
—CNBC's Holly Ellyatt contributed to this story.