Brexit - Where Do We Currently Stand?

Published date: 14/09/2018
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Over the course of the year, GBP has been pretty volatile due to the uncertainty over the Brexit negotiations, which are now hitting crunch time as the clock ticks closer to the March 2019 exit date. At this point, in order to avoid a disorderly withdrawal from the EU, not only does an agreement have to be in place, however, it will also need to be ratified by parliaments on both sides of the divide. Consequently, both sides feel that talks will have to be resolved by the end of November at the latest in order to give due time and space for governmental approval.  

This is where the key risk comes in from the UK perspective. A government divided by hardliners and pro-EU members suggest that passing an agreed deal will be anything but smooth. Some MPs believe there will be enough votes to carry a motion to proceed on an agreement, with strong opposition to an outcome which fails to secure a deal. This is all uncertainty in the greater scheme of things, and we have also heard of a significant amount of opposition to the Chequers deal. The deal brokered by the PM seeks to agree to greater alignment on customs regarding the trade of physical goods - something which has been the subject of media hype over how a no deal outcome will cause chaos to imports of food and medicine as well as supply chains crucial for companies doing business with Europe. 

The hardliners believe that such a deal will continue to hamper the UK's chances of securing trade deals away from Europe and that European regulations will maintain their jurisdiction in Britain. Pro EU MPs also have their criticisms as they want services to be included in a deal which would mean closer alignment with the EU on trade. 

The EU themselves have also suggested that they are ready to reject the Chequers plan, even though Downing St insists that this is the only credible way forward. Europe sees this as cherry picking - get the best bits from Europe - a line which has been levelled at the UK since day one. 

One thing is clear, however, and that is both the UK and EU are keen to avoid a no deal outcome. Hardline Eurosceptics may be prepared to pay the price of whatever may develop from this, and as we have noted above, the media are never shy in writing about the horrors which await should this happen.  

Even so, Europe's chief negotiator Michel Barnier has softened his rhetoric towards Europe, believing as his counterpart Dominic Raab that there is a good chance of a deal. Were it not for the uncertainty of how parliament would receive and vote on a prospect deal, we would have expected GBP to be considerably higher - closer to fair value levels which for GBP vs USD is nearer the 1.4000 mark. We exceeded this at the start of the year with a large helping hand from USD weakness, so naturally, EUR/GBP is better reflective of this and close to 0.8900 shows we are in a wait and see pattern - 0.8700-0.8800 supporting on the downside, while there has been resistance into 0.9100 as we saw a few weeks back. 

Cable support in the 1.2600-1.2700 was notable when we tested this a few weeks back, underpinned by the psychological 1.2500 mark, which may again come into focus. Price action since suggests the chances of this have been reduced considerably, but there is some way to go until March next year. It ain't over till its over!

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