Did Boris Johnson fast track next year's pound trade?
The pound could not keep its election gains as Boris Johnson reminded the world that a no-deal Brexit is firmly still on the table
Boris Johnson got his overwhelming majority in the general election two weeks ago and the pound soared from 1.3170 to a high just above 1.3500 before resting around 1.33-34 levels to end election week in the UK.
However, everything after that has been one-way traffic with the pound taking one beating after another over the past few trading days. As things stand now, cable is down by nearly 600 pips from its election high just above the 1.3500 handle.
How did it all go so wrong for the pound?
Let's try to break things down as to what things were supposed to look like:
1. Conservatives command an overwhelming majority in parliament
2. Boris Johnson's Brexit deal will easily pass through legislative hurdles by 31 Jan 2020
3. Less Brexit uncertainty as UK, EU can finalise withdrawal agreement, political declaration
4. UK, EU engage in future trade negotiations during transition period (until 31 Dec 2020)
5. If needed, transition period can be extended "for a few years" before 1 Jul 2020
However naive the thinking may be, this was the reasoning as to what allowed the pound to gain in the build up to the election - despite the fact that the majority expected was not as comprehensive as what the actual election result was.
The general reasoning is that the lesser amount of Brexit uncertainty (if it even materialises) should help with business investments in the short-term and also brighten the BOE outlook going into next year i.e. smooth Brexit outcome.
Looking further out though, if trade negotiations start to go poorly or meet a few stumbling blocks, that is when the proposed tailwind above should dissipate amid fears that a no-deal Brexit could happen; but there is still a question mark over the extension.
But Johnson threw a spanner in the works when he said that he would amend his Brexit bill so as to "legally prohibit" any extension of the transition period.
We all knew that the risk of a no-deal Brexit was still present (even before the election) but this just puts it under the microscope. In essence, it is a bit of trade that has been brought forward early because the circumstances surrounding the situation have changed.
All that said, its' important to realise that UK, EU trade negotiations have yet to begun. Eleven months looks like an impossibility but who's to say that we may not get good news?
That also means that there is plenty of time (and in the right moment) for the pound to chase gains as we look towards next year, but just keep in the back of your mind that it is still going to be another year dominated by Brexit for sterling.