How’s Brexit going?

Macro

Christopher Dembik

Head of Macro Analysis

Summary:  The GBP is back under 1.20 USD, the lowest level since January 2017 due to a sharp increase in political risk and a lot of confusion regarding what will happen at the political level by the end of the day.


The market situation this morning: the GBP is back under 1.20 USD, the lowest level since January 2017 due to a sharp increase in political risk and a lot of confusion regarding what will happen at the political level by the end of day.

What we know:

  • The PM Boris Johnson confirmed this morning that he is “committed to leading (the UK) forward and getting Britain out of the EU by October 31st”.
  •  Corbyn is meeting opposition parties and the Labour Party indicated it won’t back snap elections on PM’s terms.
  • If the Brexit extension bill is voted today, it will have key political implications as it states that the European Union can choose the length of the extension – without a limit – and the Prime Minister must agree to it.

We identify three outcomes for today’s vote:

  • The Brexit deadline is confirmedNEGATIVE for GBP, but it has already been priced in in the market.
  • The no-deal Brexit scheduled on October 31st is taken off the table by the ParliamentPOSITIVE for GBP, and it would certainly mean Brexit extended into infinity as the EU can choose the length of the extension.

  • The MPs approve a snap election (initially to be held on October 14th). POSITIVE in the short term but might lead to more confusion in the medium term. Indeed, Philip Hammond rightly pointed out this morning that if the Parliament approves a general election, the Prime minister Boris Johnson could just change the date of it until after Brexit deadline. This scenario does not take off the table the risk of hard Brexit, contrary to what has been said here and there since yesterday. On the top of that, Corbyn risk would also be back for investors, thought we consider it is less harmful for the GBP, at least in the short term.

On a final note, it is highly certain that today’s vote will not bring much clarity regarding Brexit process. At best, depending on the scenario that prevails, we can see some short-term relief for the GBP, but the currency is doomed to depreciate further in the long run as the political saga continues.

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