PM May seeks to extend the extension

Summary:

• UK PM May seeks Brexit delay to June 30
• Reports suggest EU willing to offer 12-month flexible extension
• Little reaction seen in GBP which remains not much changed on the week

Theresa May has sent a letter to European Council President Donald Tusk seeking to delay Brexit to June 30, in what is a tacit admittance that the government has all but given up on passing a deal before the end of next week’s April 12 deadline. The choice of June 30 as a leave date is the same as the last request from the PM, intended to mark a leave date before the next European parliament will sit at the start of July.

Little reaction in the pound

In terms of market moves on this news there’s not really been too much of note with the pound trading little changed as the dust settles. As far as most currency traders are concerned the chances of a no-deal remain remote but at the same time a satisfactory outcome anytime soon also seems highly unlikely and this is containing the pound in a fairly narrow trading range.        

It's been a bit of a mixed week for the pound with not much movement seen against its two most widely traded peers, the USD and EUR. Source: xStation

Another flextension?

The EU last time came back with the dual extension proposal to April 12 or May 22nd depending on May’s deal passing through parliament and there is some suggestion they will offer a flexible extension or flextension once more. Reports hint that the EU may be willing to grant an extension that last as long as a year, but would be cut short if parliament can pass an exit treaty. While the bloc’s flexibility on this is admirable it does raise three problematic questions.

Firstly, what does this mean for UK participation in the EU elections? Presumably an extension beyond June 30 would see UK MEPs take their seats before rescinding them when Brexit finally occurs - a messy and far from ideal political situation for the European parliament. Second, where does this leave UK budget contributions to the EU? And last but not least, does this really significantly improve the chances of getting a deal through the House of Commons? Sure, additional time can only help the prospects of parliament passing the required bill, but the deep divisions and fractures are unlikely to heal anytime soon. Labour MPs are highly unlikely to fall behind any proposal that isn’t substantially different to the one PM May has on the table at present and this would mean going back to renegotiate with the EU - who insist they aren’t budging on this front.

Saga to wrangle on

While the government has rightly taken a sizable chunk of the blame for failing to deliver Brexit, the two rounds of indicative votes reveal that MPs in general can’t agree on a proposal. Party politics are clearly at play with strong Labour support for a Customs Union - which in effect would likely be almost identical to May’s deal for several years at least - yet strong opposition to the PM’s proposal highlighting that they have little incentive to see the government succeed and also that they are well aware of this. From a logical point of view the obvious solution to end the parliamentary gridlock is to change those voting on it, but a General Election is both difficult to see occurring and also unlikely to provide the panacea that many hope - what if the result is an even smaller minority government?

The one thing a longer extension will provide for sure is greater levels of uncertainty which is clearly bad news for the UK economy. The latest round of PMI releases this week revealed a marked slowdown in activity in both the services and construction sectors and while the manufacturing equivalent rose this was largely due to record levels of stockpiling on Brexit fears which in itself is a concern. Taking additional measures to avoid a no-deal will be warmly welcomed by large swathes of business but the prolonged uncertainty is far from desired and while the worst case outcome looks likely to be avoided the further delay could be seen to amount to death by a thousand cuts for some.     

The GBPUSD has rejected the prior support at 1.3121 this morning and this level could now be seen as resistance. Also keep an eye out for NFPs this afternoon which could effect the USD side of the cross. Source: xStation