government loses article 50 case but brexit fears weigh on pound 1842602017

The pound has fallen to fresh session lows after Judge David Neuberger from the Supreme Court said that Article 50 cannot be triggered until after […]

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By :  ,  Financial Analyst

The pound has fallen to fresh session lows after Judge David Neuberger from the Supreme Court said that Article 50 cannot be triggered until after a Parliamentary vote, the Supreme Court Judges voted by a majority of 8-3. This was expected, however, the pound’s reaction has left some puzzled. Typically the pound has welcomed greater Parliamentary scrutiny of the Brexit process, however, the pound could be coming under pressure because the Supreme Court did not uphold a legal quirk called the Sewel Convention in its ruling.

Judge Neuberger said that Regional Assemblies do not have an Article 50 role, and that the government does not need to consult Scotland separately on triggering Article 50. The Sewel Convention stated that Westminster cannot legislate on all issues to do with Scotland, however, it looks like the Supreme Court has given Westminster power over the devolved governments, which is a key win for Theresa May.

If the Sewel Convention had been upheld, then May’s plans to trigger Brexit by the end of March would have looked unachievable, as she would have had to consult the governments of Scotland, Wales and Northern Ireland, and the latter doesn’t even have a government at the moment.

This leads us to the question why the pound is falling? Here are three potential reasons:

1, The ‘good’ news about greater Parliamentary scrutiny of the Brexit process has already been priced in. the pound had rallied more than 4% in the past week as we led up to the decision. Thus, profit taking is to be expected at this stage.

2, The market is spooked by the fact that Theresa May is now likely to trigger Article 50 by the end of March, as the Parliamentary vote is likely to pass. This brings us closer to Brexit reality, which could scare some investors off the pound, and we could some profit taking in the short term.

3, The fact the Sewel Convention was not upheld, and that Scotland will not be consulted, could stoke the ire of Nicola Sturgeon’s SNP, which in turn could push for a second Independence Referendum from the UK. Recent polls suggest that a second referendum may see the Scottish Nationalists win, and Scotland vote to leave the UK, in order to stay in the EU. Thus, this ruling could sow the seeds for the break-up of the UK as we know it. This could cause a deeper, more prolonged decline in the pound.

We will analyse this decision and its impact on UK assets in more detail later on, for now, it looks like the decision is spooking pound traders and FTSE traders alike, and the UK index is also lower on Tuesday. UK Gilt yields are higher, although that may be something to do with the UK’s debt level rising, again, to a new high of 86.2% of GDP.

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