GBP optimism appears to turn as traders finally consider that a Brexit “technical extension” is the most likely scenario to be favored by negotiating participants as details of the arrangement would require two additional months. A variant of the customs partnership initially proposed by former Prime Minister May, which would be applied exclusively to Northern Ireland, should maintain the consensus. In addition, difficulties remain, since Northern Ireland Democratic Unionist Party stays difficult to convince ahead of a UK Parliament special sitting from Saturday 19 October 2019. As the odds of seeing a divorce deal to be drawn up before the two-day summit of EU leaders starting tomorrow is rather scarce, GBP is expected to remain under pressure in the coming days.
The center of attention should now turn towards an article 50 extension, a move that should be supported by the EU in light of the latest efforts in ironing out a deal. Yet risks are largely on the British side as UK PM Boris Johnson could well decide to invalidate the appeal in the pursuit of his “do or die” pledge. In the event of another short extension to be recognized, the challenges in persuading Northern Ireland that an administratively costly customs partnership is the best solution, not to mention the general acceptance by the British Parliament of a new withdrawal agreement, should stay high. The recent trend towards optimism in GBP is expected to be tempered for the time being, as investors will be closely following today’s EU session ahead of the EU summit.
GBP/USD is currently trading at 1.2740 (+4.30% since last Thursday), expected to decline along 1.2660 after reaching 1.2787 (15/10/2019 high).
