Brexit breakthrough?

Thought of the day

by Chief Investment Office 17 Oct 2019

EU and UK negotiators have agreed on the draft text for a revised withdrawal agreement. European Commission President Jean-Claude Juncker said, "Where there is a will, there is a deal – we have one! …I recommend that (the EU summit) endorses this deal." British Prime Minister Boris Johnson said: "We have a great new deal that takes back control."

The announcement pushed the pound as high as 1.2990 against the US dollar, and EURGBP fell as low as 0.8575. But at the time of writing the pound had given back part of these gains to trade 0.6% higher against the USD at 1.29 and only 0.1% stronger against the EUR at 0.8615. This reaction reflects the fact that further twists and turns in the Brexit story are likely in the next few days.

Amid the optimism about a deal, it is important to remember that the agreement still has to be agreed to by the EU27 heads of state as well as the UK parliament. As things stand, parliamentary ratification is far from certain. Support for the revised agreement has not been forthcoming from Northern Ireland’s Democratic Unionist Party, which is likely to be needed to get the deal over the line.

It is still likely that a technical extension may be required even if the revised deal is consented to by all parties, given the weight of legislation that will have to be scrutinized and passed by parliament.

The outcome that investors feared the most, a no-deal Brexit, seems less likely now than at any time in the last few months. If parliament does not ratify the deal and a General Election is called, Johnson will likely be campaigning on a platform of having secured an agreement. The opposition Labour Party would be likely to campaign on the basis of putting the new agreement to a second referendum.

While the ultimate outcome remains uncertain, we retain our overweight position in sterling versus the US dollar in our FX strategy. If a convincing deal is reached we could see GBPUSD rallying to 1.35. If the deal is voted down by British MPs and there is an extension followed by a General Election, GBPUSD would likely settle between 1.26 and 1.32. The no-deal Brexit scenario, which could have sent GBPUSD as low as 1.12, now appears the least likely outcome.

Do you like this?

Please click below to sign up for more investment views.