The recent recovery in British pound following UK PM Boris Johnson friendly meeting with German Chancellor Angela Merkel in Berlin on Wednesday is not expected to endure as upcoming meeting with French President Emmanuel Macron should break any glimmer of hope that the EU is willing to find common ground for what concerns the Irish backstop. Meanwhile, Chancellor of the Exchequer Sajid Javid is expected to postpone naming a successor to Bank of England Governor Mark Carney beyond 31 October Brexit deadline, with current departure date set for end-January 2020. Next year’s budget will probably face a similar fate amid potential general elections that are likely to be triggered when UK Parliament returns from vacation. The latter would ultimately result in a “forced” short-term extension, allowing fresh negotiations with new EU representatives. However, for the time being, Merkel’s “30-day challenge” to find appropriate solutions on the border between Ireland and Northern Ireland is on, although the baseline of a no-deal Brexit scenario appears most relevant for now. Additionally, the recent uptick in UK government deficit is alarming considering PM Johnson’s commitment on tax cuts and further spending.
Indeed, the recent challenge seized by Johnson to find a solution to existing backstop issue in the coming 30 days (70 days before Brexit) is less likely under existing EU administration, as numerous technological solutions suggested had already been rejected in the past, thus confirming that the view of a EU back down concerning the backstop is dubious. Today’s meeting with Macron should therefore conclude with no common agreement on a solution, a news that should weigh on GBP. While UK politics appears stuck, the situation is not very bright on the front of the government budget as well. The budget deficit for the first four months between April and July for FY 2019/20 stands at GBP 16 billion ($19.4 billion), a rise of 60% from same period last year, raising questions whether the UK government will be able to maintain budget deficit below former Finance Minister Philip Hammond target below 2% of GDP or GBP 29.3 billion forecasts from March 2019.
Considering upcoming events, GBP/USD is expected to lose momentum, approaching 1.2110 short-term.
