Uncertainty to hurt pound after Lords amend Brexit bill

With the House of Lords rejecting the Brexit bill in its current form, will this lead to a standstill, thus forcing the pound lower still?

Palace of Westminster, London
Source: Bloomberg

Yesterday saw the House of Lords reject the government’s Brexit bill, paving way for greater uncertainty and potential delays in enacting article 50. The subsequent fall in sterling points towards the fact markets do not appreciate the greater degree of ambiguity generated from this decision. The question now is whether this will truly form a roadblock and what the next steps will be in this process which will have significant implications for the pound.

Firstly, the approval process is best shown in the image below (courtesy of the BBC), with the current stage summed up in the bottom left section of the flow. Ultimately we remain within a potential stalemate between the decision of the Houses of Commons (to keep the bill unchanged) and the House of Lords (which wants an amendment to provide certainty for EU citizens living in the UK). 

Article 50 process

Ultimately it is a case of one house conforming to the other’s decision, starting with the Houses of Commons. Should it decide to accept this amendment, then the resolution would be swift. However, the threat here is of deadlock, where both Houses are unwilling to budge on the matter. Given the fact many of the MPs in parliament will be towing the party line, there is a good chance we will see the issue thrown back to the Lords, who are expected to concede should they be propositioned once more. This is certainly an issue to follow closely as the continued impasse only serves to devalue the pound, which has seen a sharp deterioration overnight, thanks in part to the House of Lords’ decision.

The daily GBP/USD chart below highlights the break below $1.2388 support, bringing with it substantial weakness for the pair. The inability to break through $1.2775 last month was a warning sign that we could see further weakness, with a move back into $1.2158 a distinct possibility. Should we see this bill delayed much longer, it would likely hurt the pound owing to the greater uncertainty. However, given the uncertainty that will soon come from invoking article 50, it is likely there will be a drag on the pound for some time yet, even if it is incredibly cheap by historical standards. A break back through $1.2711 would certainly help portray this marking in a more bullish light.

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