Abu Dhabi, UAEWednesday 19 February 2020

The pound's fortunes hinge on the Brexit outcome this weekend

If a deal is passed this could be positive for sterling assets, says Gaurav Kashyap

Discussions between the UK and the European Union have heightened in recent days. AFP
Discussions between the UK and the European Union have heightened in recent days. AFP

It’s a key week with Brexit negotiations set to climax this weekend — a story we have been tracking for well over three years, which now comes down to a matter of days.

While discussions between the UK and the European Union have intensified over the past few days with slight positivity, concessions still remain. As officials desperately stretch to reach a middle ground before the European Union Summit, which takes place on Thursday, the issue of the Irish backstop has hindered any real progress.

It's very difficult to predict outcomes heading into the final stretch but an extension looks likely at this stage.

Gaurav Kashyap

The two-day summit is not seen as a forum for further negotiation, but more of a way to agree and approve the withdrawal agreement before Prime Minister Boris Johnson heads back to the UK from Brussels on Saturday to head an emergency meeting with his MPs to get the deal passed.

It will be the first parliamentary sitting on a Saturday in more than 37 years and only the fourth time in history it's happened on a weekend. It will be at this emergency session that UK MPs will agree or reject any deal presented to them by Mr Johnson and his team of negotiators. While it remains to be seen whether the latest proposal is approved or rejected, we know by law that Mr Johnson must ask for another delay (under the Benn Act) if no deal is approved by UK MPs. This also applies if they have not agreed to a hard Brexit either.

It's very difficult to predict outcomes heading into the final stretch but an extension looks likely at this stage, which would ultimately see a collapse of the current government. In the event a deal is passed, and Brexit takes place on October 31, this could be positive for sterling assets heading into the final months of they year. In the highly unlikely event parliament cannot agree, and Boris Johnson tries to sidestep the Benn Act and force a no-deal, this would cause the most volatility in GBP assets and the most damage for future pound prospects.

The most realistic outcome at this stage — an extension — would see volatility in the near term, before prices stabilise and continue to trade in the current ranges. In the next few days, however, expect moves to be sharp in GBP crosses with near-term resistance kicking in at 1.22 levels and 1.19 levels strongly tested and likely to hold in a worse-case scenario.

Along with Brexit, we also saw a restart of trade talks between China and the US this week, as a round of US tariffs on Chinese goods are set to kick in at the end of the year. While both countries appear optimistic of a trade deal, nothing has been confirmed and the devil will, once again, remain in the detail. Both parties do seem open to negotiation (China gave up some ground this past week on the purchase of agricultural products), so what concessions will be given remains to be seen. Tariffs on $250 billion (Dh918 bn) worth of Chinese goods, which were scheduled to increase from 25 per cent to 30 per cent this week, will be pulled, so watch for positive developments.

While Brexit and the trade war are enough to drive volatility throughout the month, I am also keeping an eye out on the European Central Bank rate decision, due out next week, along with the US Federal Open Market Committee meeting on October 30. I maintain that future central bank policies will be the key theme going forward — along with the reversion from hawkish to dovish policy — however, all eyes will be on Brexit for now.

Gaurav Kashyap is a market strategist at Equiti Global Markets. The views and opinions expressed in this article are those of the author and do not reflect the views of Equiti

Updated: October 15, 2019 02:51 PM



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