Now that the risk of a hung parliament and a second Brexit referendum have been averted following the resounding majority of the Conservatives, UK PM Johnson has the field open to introduce the Withdrawal Agreement Bill negotiated earlier in October 2019 with EU leaders to the UK Parliament. Accordingly, UK MPs are likely to support the general principles of the agreement and should debate on its details during a three-day period ending 9 January 2019, allowing time to pass the legislation before the 31 January 2019 deadline. On the same line, the Bank of England maintained the Bank Rate unchanged at 0.75% during its monetary policy meeting while expectations of a rate cut by next meeting due on 30 January 2020 is likely. In this context, GBP should stay firm following the headline, with GBP/USD bouncing back from 1.3009 (19/12/2019), a 12-day low.
With the signature of the Brexit legislation becoming clearer and following the latest weakness of economic releases, including average earnings of 3.20% (prior: 3.60%) in October, a 13-month low, followed by industrial production, which marked at -1.30% (prior: -1.40%) in October and retail sales, flashing at 1% (prior: 3.10%) in November, a 19-month low, confirm the view that further easing is on its way. Additional downside risk should continue to weigh on the pound, as PM Johnson’s willingness to insert a clause that would remove the option for the UK government to request an extension of the transition period deadline beyond 31 December 2020 is likely to fuel the debates of the coming days. In the meantime, headlines concerning the negotiations with EU leaders that will take place thereafter are expected to play a major role in the development of sterling. On a side note, former Deputy Governor of the BoE and currently head of the Financial Conduct Authority, should take Mark Carney’s Governor functions following his departure on 31 January 2019.
