Brexit woes continue to drag on the pound -- from CMS Prime
After a referendum in June 2016, the UK Government invoked Article 50 of the Treaty on the European Union. This was meant to start a 2-year process for the UK to leave the EU by March 29 this year.
That withdrawal deadline has passed, and the UK has been given a fresh 6-month extension by the EU due to Britain's inability to agree on withdrawal terms. The next withdrawal date is now set for October 31, 2019.
Brexit has been the primary focus for the direction of the GBP since the UK voted to leave the EU and this has now intensified since March 2019.
This article will consider the role that the new UK Prime Minister will have on Brexit negotiations, the key sticking point of the Northern Irish backstop, and the impact on the GBPEUR pair as well as other safe haven currencies that we would expect to find buyers in the event of a no-deal Brexit.
New UK Prime Minister and the concerns regarding Brexit
There has been a change of Prime Minister in the UK recently. This occurred after Theresa May resigned on June 07, 2019 due to her inability to secure an agreement in UK parliament for a managed withdrawal of the United Kingdom from the European Union.
The new Conservative Party Prime Minister, Boris Johnson, who was formerly the Mayor of London and British Foreign Secretary has a very different negotiating approach to Theresa May.
Theresa May was a remainer at heart, and that desire worked its way into her negotiating strategy. In contrast, Boris Johnson has favoured Britain leaving the EU, and that approach has filtered through into his negotiating style with the EU.
Whereas Theresa May was working very hard to avoid any possibility of a no-deal Brexit, Boris Johnson is openly advocating that a no-deal Brexit may be unavoidable.
The fall in the GBP, since Boris has taken over as PM, has been the market pricing in an ever-increasing likelihood of a no-deal Brexit. The key area of disagreement remains the Northern Irish backstop border problem.
So, let's take a closer look at some of Boris Johnson's next steps and how he can navigate around the backstop problem.
The problem of the backstop
The key sticking point in the Brexit negations has been the border that separates Northern Ireland and the Republic of Ireland. The border has significant political implications for Europe, the United Kingdom and the Republic of Ireland.
As a consequence of the particularly heightened sensitivity of this border, the UK and the EU have agreed that in the Brexit negotiations there should be no new physical checks at the border.
The alternative is that there's should be a backstop position where a seamless border is maintained on the whole of Ireland, both North and South.
This 'backstop' scenario is only to come into play if the UK and the EU do not agree on a final deal at the end of a standstill transition period or if the final deal does not ensure a soft border.
Now here is the crux of the problem. The EU insists that any Brexit deal must have a 'backstop agreement in place'. The EU wants to protect the Republic of Ireland, which is still a part of the EU.
On the other hand, Boris Johnson is insisting that the backstop must be removed from any future agreement. The UK fears that the backstop agreement will potentially bind the UK into never being able to leave the EU. This is the impasse between the UK and the EU.
The key point to realize is that the backstop will not be in place if the UK has what is called a 'no-deal' Brexit. Boris Johnson is therefore willing to embrace a no-deal Brexit in order to avoid the problem of the backstop agreement.
From here Boris Johnson has to set out a range of alternative options to the Irish backstop that the EU agree to before October 31.
The impact on EURGBP
The prevailing sentiment for the GBP/EUR pair has been a weakness in the GBP as the prospect of a no-deal Brexit has grown, see the weekly chart below:
The GBPEUR pair will continue to be sensitive to news relating to Brexit. The GBPEUR as well as all other major currency pairs are available for trading at CMS Prime. As Parliament resumes from September 05, there will be various headlines and developments. Here are the three scenarios to watch for and any news that indicates we are heading towards one of these scenarios below will move the GBP. The three key scenarios to watch for are:
Scenario 1 - A no-deal Brexit
This will result in immediate GBPEUR weakness as the GBP is sold off heavily. It remains to be seen whether it will be a 'sell the rumour, buy the fact type of response', but it is a scenario to be aware of as a possibility, particularly as the prospect of a no-deal Brexit, is priced in more and more to the GBP.
Scenario 2 - Brexit with a deal
A Brexit deal will result in immediate, and prolonged, leading to GBPEUR strength as the GBP is bought on relief that a no-deal Brexit has been avoided.
Scenario 3 - Brexit is postponed
This scenario again will see GBPEUR strength with the GBP being bought on the relief that a no-deal Brexit has been, at the very least, temporarily avoided.
Safe haven currencies to trade: The appeal of the JPY and the CHF
In the event of a serious souring of risk sentiment around any future Brexit developments, there would be an instant bid into safe haven currencies too.
Even though both the Swiss National Bank and the Bank of Japan have negative interest rates, their currencies are considered to be the safest currencies to buy in the result of a crisis. The JPY and the CHF would be bought on any incoming risk off flows.
The GBPJPY and GBPCHF would both fall particularly hard on a no deal outcome. A commodity that we would also expect to find buyers would be Gold. Gold should find bids on a serious breakdown of Brexit negotiations as a safe haven play the extent of those bids would depend on the perceived severity of the actual breakdown.
This article was submitted by CMS Prime.
