A race against time

The ongoing Brexit saga took a positive turn at the end of last week, but there’s still a long, long way to achieve a tangible deal. When Boris Johnson and Leo Varadkar agreed that they could ‘see a pathway to a possible deal’ on Thursday, markets naturally overreacted, driving Sterling to pre-Johnson levels against the Euro and Dollar. Yes, the chances of a deal before the deadline have improved, but only marginally. This is because major hurdles still exist between the UK and EU’s negotiating positions. Just yesterday, EU negotiator Michel Barnier, told diplomats that the UK’s proposal to keep Northern Ireland under the UK’s customs remit, while avoiding a hard border with Ireland fell short of a workable solution. So, the Pound’s furious 24-hour rally was likely fuelled by optimism that the UK now won’t be crashing out of the EU on Oct 31st – the much-fabled ‘hard Brexit’.

With that said, let’s have a look at the key players and major events over the next 17 days.

Firstly, it goes without saying that the next 48-hours are crucial, with talks running right up to the EU summit on Wednesday. Officials locked in secret Brussels negotiations need to find an acceptable resolution to the Irish border issue, otherwise, there will be no basis for a new deal that Johnson can take to Parliament. Even if a deal is struck, Johnson no longer holds a majority in the House of Commons and will have to appease both the DUP and hard-line Brexiteers in order to find enough support for his deal. The Queen’s speech will also signal the re-opening of Parliament on Oct 14th so watch out for any renewed murmurings of a vote of no-confidence.

If nothing is agreed before the upcoming EU summit, Michel Barnier could allow an extension of talks further into October, with the potential of offering the UK a technical extension if it looks likely that the two sides can broker a deal, but not before the Oct 31st deadline.

On Oct 19th, Boris Johnson plans to hold a rare Saturday sitting of parliament to allow them to decide the next steps. If an agreement has been struck with Brussels, it could be put to a vote as well. Otherwise, Johnson will have until the end of the day to write to the EU, requesting a delay to Brexit until Jan 31st, which is legally required under the Benn Act.

If Johnson fails to seek an extension, all hell could break loose. MPs could take the decision out of his hands and legislate a Brexit delay, move to bring down his government, or try to cancel Brexit altogether. If you think back to our Friday commentary, the market is pricing a short extension with Sterling depreciation risk reaching its apogee at the end of H1 2020.

Bottom line: That’s a lot of ‘ifs’, but that’s just how fluid the situation is. No one really knows what’s going to happen with Brexit, but significant Sterling volatility over the coming weeks is expected. One-month implied volatility in GBP/USD has climbed to the highest since April, when Theresa May negotiated a six-month extension to the original departure date. Moves in the Pound will continue to be tied to anything Brexit-related, but sentiment has definitely improved.


At the end of last week, the Pound had its biggest two-day rally in two decades as it climbed by just shy of five cents against the US Dollar, reaching highs of 1.2707. The rally came following comments that a new Brexit deal could be achieved by the October deadline. The Pound opened Monday trading below the trade-weighted index’s 200-daily moving average – a level that may provide significant resistance for the Pound throughout the week.

  • The first set of key UK data out this week is on Wednesday as inflation figures are released. Year-on-year CPI is the main one and is expected to come in 1.8%, just shy of the target 2.0%, but up from 1.7% last month.
  • On Thursday morning, month-on-month Retail Sales for September is set for a mild improvement to -0.1%, up from -0.2% previously.


Last week, the Euro Index held onto most of October’s gains as it hit resistance at the 50-daily moving average mid-week. Despite this, the Euro is trading above the 1.10 level against the US Dollar on Monday’s open and could be supported by this key level throughout the week. A light week of European data ahead may bring low volatility for the currency this week.

On Tuesday morning, the German ZEW Economic Sentiment Survey is released, and expectations are for a deterioration, placing the measure deeper into negative territory. The measure provides one of the most up-to-date insights into the Eurozone’s largest economy and may set a negative tone for the Euro for the remainder of the week.


Last week, the US Dollar Index extended October’s losses reaching three-week lows as risk assets across the board ticked higher. The index found support at its 50-daily moving average on Friday and has kept above this key level on Monday’s open. On Monday, the US is celebrating Columbus Day, meaning trading volumes are likely to be lower than usual.

  • On Tuesday afternoon, the Empire State Manufacturing index will be released and is expected to fall to 1.1 from 2.0 in September. A positive reading still points to improving conditions, but expectations are for a slower rate of improvement than last month.
  • Month-on-month Retail Sales and Core Retails Sales will be released on Wednesday and are both expected to show expansion. Core retail sales which remove the more volatile automobile goods is expected to come in at 0.2%, up from 0.0% last month.
  • On Thursday, the Philly Manufacturing Index is expected to mirror Tuesday’s Empire State Manufacturing Index by showing a slowdown in the rate of improvement of economic conditions. Both these measures may prove important for the US Dollar this week as concerns are growing that the global economic slowdown is reaching US supply chains.