Just when we thought that last week’s Tory election victory would bring some lasting relief to the Pound, the return of hard-line Boris Johnson has brought us back to reality. It was perhaps foolish to think that the new majority government would take a more liberal stance on Brexit and markets were probably caught up in the romance of ‘getting Brexit done’, but it’s now clear that the UK will have no longer than 11 months to negotiate a full trade deal with the EU. Yesterday’s announcement by Johnson that he will place into law a guarantee that the Brexit transition phase is not extended, effectively sets up a scenario where the UK could leave the EU with a no-deal—meaning World Trade Organisation terms—after December 31st, 2020. The Pound has responded as expected, losing almost 2.0% of its value against the US Dollar from yesterday’s highs.
As for the new schedule, Johnson is expected to force his revised withdrawal bill agreement through the House of Commons this Friday, with a view to the UK officially leaving the EU on January 31st. The transition period would then kick in, giving the UK time to negotiate a permanent set of trade rules with the bloc before the end of 2020. Failure to do so would mean the immediate imposition of tariffs, quotas and other regulatory checks that could cause chaos to many UK and continental businesses. It now looks as though the Pound is on another collision course with rising uncertainty that could result in markets beginning to reprice no-deal risk into Sterling’s value.
Bottom line: Alas, it could have gone another way. Johnson might’ve used his majority to marginalise the hard-line European Research Group and follow a Brexit model that would win the approval of British industry. However, it now seems as though the Pound’s surge predicted by many analysts was rather short-sighted, and the reality is likely to reflect that the risk has only been deferred, not eliminated
The pair opened with heavy Sterling pressure on Tuesday, sending Cable back below pre-election levels at the 1.32 figure. Heightened perceived risk of a no-deal Brexit at the end of the transition period on December 31st 2020 is partly to blame for the move, which is exacerbated by light December liquidity. The trade-weighted Sterling index now trades below the highs reached in March 2019.
The currency cross has dipped below the key 1.19 level that provided significant resistance earlier in the month. Sterling is the main culprit of the move as the Euro is relatively unchanged. With all major UK and European data already out for today, market sentiment will remain the driver of the pair.
EUR/USD volatility remains low, having dropped off the high 1.11’s last Friday. The pair has failed to maintain above the 1.1150 level this week, which coincides with the 200-daily moving average. The 50-daily moving average currently sits at 1.1074 which could support the pair in the short-run. Greater intra-day volatility may come this afternoon when US data gets released.