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British Pound Braces for Brexit Turmoil. General Election Ahead?

British Pound Braces for Brexit Turmoil. General Election Ahead?

2019-10-28 07:00:00
Dimitri Zabelin, Junior Currency Analyst
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British Pound, Brexit, BoE – Talking Points

  • UK Prime Minister Boris Johnson may put forward motion for general election
  • EU officials may offer Brexit extension in various intervals through January 31
  • Will EU-UK divorce uncertainty force BoE to cut interest rates before Brexit?

Learn how to use political-risk analysis in your trading strategy!

UK Prime Minister Boris Johnson is expected to request an early election from Parliament for a third time during his tenure. Despite his best efforts, the PM may very well have to break his campaign promise of having the UK depart from the EU on October 31. Two months ago, a law passed by Parliament compelled him by law to ask for an extension since he was not able to both procure and secure a deal during the EU summit.

There is wide speculation that the EU will grant an extension to the UK, though the length is still unknown. Officials from Brussels will be meeting on Monday to discuss an extension plan that could reach out as far as January 31 with an option to exit sooner if a deal is ratified. Here are the possible deadlines from a draft shown to the officials representing the 27 EU member states: 30 November, 31 December or January 31.

If European officials agree to a three-month delay, Mr. Johnson would also have to agree to avoid a no-deal Brexit which was outlined in the same law that was passed that compelled him to ask for an extension. The main point of focus on Monday will be Boris Johnson’s call for a December election in hopes that a consolidation of power could help him push through his Brexit deal and finally end the deliberations.

However, he will need to secure the support of two-thirds of Parliament before his motion is ratified. In the meantime, the British Pound will remain anxiously suspended until more clarity is provided. As we’ve seen this year, sudden developments regarding Brexit have the potential to cause massive swings in GBP. The most recent example was when EUR/GBP erased over 20-days’ worth of gains in 24 hours.

How Will Brexit Extension Impact BoE, British Pound?

There is another point GBP traders will have to consider. If there is an extension to January 31, the interim may be long enough for the BoE to make a rate move; more specifically to cut lending costs. Uncertainty about Brexit has weighed on the UK economy and negatively impacted business and consumer confidence. If anxiety about the divorce persists and undermines the central bank’s objectives, the BoE could cut rates.

Alternatively, monetary authorities may wait to deploy their ammunition until the outcome of Brexit is determined. If the UK falls out of the EU without a deal, the BoE will need to use all the tools at its disposal to cushion the blow of a disorderly outcome. Even if the there is a deal – and a temporary relief rally in GBP – the UK will find itself in a contracting global economy with more protectionist inclinations.

The BoE may therefore want to save future rate cuts to counter a downturn unrelated to Brexit. In the meantime, the British Pound may move sideways until there is news on the success or failure of Mr. Johnson’s bid for a general election. Even then GBP traders may be hesitant to commit capital because the time horizon between this week and election is substantial, and a lot of progress or setbacks could occur in the interim.

Market Analysis of the Day: UK CPI Declining as Brexit Uncertainty Haunts Consumers, Producers

Chart showing UK CPI

GBP TRADING RESOURCES

--- Written by Dimitri Zabelin, Jr Currency Analyst for DailyFX.com

To contact Dimitri, use the comments section below or @ZabelinDimitrion Twitter

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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