(25 October 2019 ) DAILY MARKET BRIEF 1:GBP volatility to stay amid EU extension, potential UK elections

(25 October 2019 ) DAILY MARKET BRIEF 1:GBP volatility to stay amid EU extension, potential UK elections

25 October 2019, 12:56
Jiming Huang

There is absolutely no chance that a “do or die” pledge can be made on the Brexit issue. Despite a victory in principle granted to Prime Minister Boris Johnson on Tuesday after the approval of the draft law on the withdrawal agreement, the rejection of its final approval, which should have been adopted by the House of Commons in a record three days turns the focus of attention to the EU. Although risks of a no-deal Brexit is certainly off the agenda and a Brexit extension appears likely, the question arising is whether EU leaders would offer a short 1-month period or a longer 3-month period by today or Monday. In the context of an increasing general election scenario in the UK, we would certainly consider that a postponement to January 31, 2020 should be preferred. Accordingly, Sterling should benefit from a rebound following the extension announcement while a strengthening of PM Johnson Conservative party following general elections would definitely increase the case for a fully approved Brexit deal by January 2020 deadline. However, major obstacles remain, as the government's motion to hold early general elections on 12 December 2019, which is due to be voted on Monday in the British Parliament, is met with opposition, thus increasing the case for GBP decline if rejected starting from next week.

Following pre-approval of the Withdrawal Agreement by 329 votes to 299 votes, UK PM Johnson would face further challenges in passing a non-confidence vote because the support of two-thirds of MPs (c.f. Fixed-term Parliaments Act 2011) is necessary to call a general election, a rather dubious plausibility considering the lingering resistance faced. As in prior exercises, the Labour Party (~38% of votes) calls for the no-deal Brexit risk to be removed as a precondition for obtaining backing, although the low support in existing election polls should explain the party’s positioning. Yet dissidents in the Labour party may well play a key role in obtaining the 434 votes required to pass the motion if Jeremy Corbyn still withstands. Therefore, GBP volatility is likely to rise starting from next week..

By Vincent Mivelaz

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