Brexit - Three Things to Watch for

Brexit – three things to watch for:

  • No-deal
  • Extension
  • Let’s call the whole thing off

The Brexit saga – the process of the UK attempting to leave the European Union – has proved itself to be an incredibly protracted affair. Following the 2016 referendum which returned a 48% - 52% poll in favour of leaving, it seems like there has been an awful lot of talking but very little progress. Nursing what could perhaps be best described as only a technical majority in parliament, the UK Prime Minister Theresa May has managed to navigate a string of hurdles in recent months, leaving the UK just weeks away from the March 29h deadline for departure – but still without a firm deal on the table.

So what happens next? Arguably as the deadline approaches, the dust is starting to settle and one of three key paths are emerging.

  • An extension to the deadline

This appears to be the most likely outcome at present. There’s no practicable way that given the unanswered questions, an orderly departure from the European Union can be engineered by the end of March. As was seen towards the end of February, any suggestion that the deadline will be extended has served to bolster Sterling. Not only does this play down the prospects of no-deal, but it also leaves the door open to the outside chance of the whole Brexit process being cancelled.

Trade idea – any talk of extending the deadline is likely to be positive for GBP in the short term

  • No-deal

From an economic perspective, arguably the most problematic of all the possible outcomes. Bank of England governor Mark Carney warned again last week that it was impossible for the UK to guard against the economic shock that would be caused by a no-deal scenario. There’s simply insufficient warehouse space available to bunker supplies needed for an orderly market to continue. Inflation would be a natural consequence as consumers competed for a limited supply of goods, creating abnormal market conditions. With investment already starved, increasing interest rates would be an unlikely way to manage the situation, suggesting the risk of new stimulus measures which would in turn damage Sterling.

Trade idea – if a no-deal option looks likely then the Pound can be expected to come under significant pressure as a result.

  • Let’s call the whole thing off?

 The song may have been written more than 80 years ago, but many Europhiles in the UK are hoping that the ethos may yet be played out today. Given recent developments that have seen the possibility of a no-deal Brexit pushed off the table, something that will likely be confirmed on March 12th in a parliamentary vote that now looks like a formality, the UK remaining part of the European Union looks unlikely. However as we have seen in recent weeks, Brexit at times can move quite quickly. If events unfold in UK politics that threaten a snap general election and find an extension for Brexit beyond the March 29th, then this campaign would likely be fought on an agenda of whether the country should remain in the EU. Although a general election would bring a degree of uncertainty, the glimmer of hope that the UK could remain fully integrated as part of the world’s largest trading bloc may be sufficient to keep propping up the Pound.

Trade idea – whilst a general election being called would likely hit Sterling in the short term, any suggestion that the outcome could keep the UK in the EU would be GBP positive.

Brexit has thrown the UK into unchartered territory in terms of politics and the risk of squaring up to the reality of some painful, self-inflicted harm, especially if a no-deal outcome is realised. However as the dust begins to settle, the worst case scenarios are ebbing away. The country will likely be haunted by this move for decades but there are still trading opportunities to be found.

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The Brexit saga – the process of the UK attempting to leave the European Union – has proved itself to be an incredibly protracted affair.