GBP volatility is most likely to stay as Saturday extraordinary session of the British Parliament should have a significant impact on GBP direction. Although the odds are rather favoring a refusal of PM Johnson’s deal, it appears that chances of a hard Brexit have decreased anyway at the advantage of an orderly divorce scenario if any, a rather good news for upward GBP developments. Nevertheless, in this context, the uncertainty regarding a request for a three-month extension to be rejected by EU Member States would be limited, paving the way for general elections or a second referendum in the United Kingdom and a possible referendum on Scottish independence. Even in the event of a quick deal, the Bank of England is most likely to remain silent, since its assessment of reversible (i.e. global trade slowdown) and non-reversible effects (i.e. net economic loss due to EU departure) is expected to take time. However, we would set aside the prospect of rate hikes and instead consider a downward rate trajectory.
Brexit attention has now intensified, as the British Prime Minister Johnson’s withdrawal agreement, which includes a customs partnership exclusively applied to Northern Ireland, is expected to be approved by EU leaders, while most risks are mainly on the British side. Even if votes should be close, it seems that the ruling Conservative party should lack of support, with Northern Ireland Democratic Unionist Party, Scottish National Party as well as the opposing Labor party planning to reject the proposal, considered to contain more flaws than the agreements proposed by former Prime Minister May. In case the divorce agreement is turned down, Prime Minister Johnson should either ask the EU to grant a further extension under Article 50 of the Benn Act or resign in an attempt to strengthen power through general elections. If accepted by the EU, the extension should open up complexities as general elections, a second referendum or additional talks with the EU could happen. For now, GBP is expected to remain unstable, with downward pressures to dominate amid expectations of a rejection of a withdrawal agreement tomorrow.
