(20 September 2019) DAILY MARKET BRIEF 1：Brexit surpasses BoE warnings

The statement made by the BoE has a rather muted impact on financial markets as most market reaction is mainly driven by Brexit headlines. The constructive signals sent by European Commission President Jean-Claude Juncker on a potential trade deal by 31 October 2019 deadlines gives the British pound a boost, trading at two months high against the greenback. Yet it appears that no clear breakthrough are on the way as mentioned by PM Minister Johnson and Irish Foreign Minister Simon Coveney, which seem rather pessimistic that an arrangement can be reached.

Although the Bank of England is indicating that it is willing to cut rates in the event of chronic Brexit uncertainty or a global economy drawdown that would induce a slowing UK economy and inflation, investors seem to overlook the fact that the latter would certainly narrow GBP appreciation potential in the event of Brexit extension for instance. The center of attention will probably change once the Brexit deadline is due anyways, with longer-term fundamentals prevailing over short-term Brexit news. In the event of a no-deal Brexit, we would also consider the BoE to implement rate cuts to limit an economic downturn despite risks of accelerating inflation while a constructive Brexit divorce could well lead to rate increases in the medium term. On the Brexit front, it seems that no concrete progressions have been made as Brexit Secretary Stephen Barclay is holding talks with EU chief negotiator Michel Barnier today in Brussels. Attention now turns to the decision of the UK Supreme Court ruling due early next week on whether prorogation of Parliament is considered unlawful and if so whether it is willing to close the gap so that UK PM Johnson will not be able to restore the prorogation after the ruling. If deemed unlawful, UK MPs would have the opportunity to come back to action immediately and look for alternatives to the Brexit extension bill validated earlier this month. The scenario consisting of MPs backing general elections is still far from being the case for now. Otherwise, UK Parliament would return on 14 October, thus limiting the room of maneuver for action ahead of the official Brexit deadline.

GBP/USD (+0.28% week-to-date) is currently trading at 1.2536, bouncing from 1.2066 (02/09/2019 low) and approaching 1.2520 short-term.

By Vincent Mivelaz