Brexit stories: trading the GBP

Brexit stories: trading the GBP

Britain has to leave the European Union in 66 days. Will it leave with a trade deal (good for the GBP) or without one (bad for the GBP)? Let’s catch up with the recent developments in the UK.

Latest events

  • British parliament rejected Theresa May’s Brexit plan.
  • Theresa May managed to win a vote of confidence as a Prime Minister.

The things listed above mean that Theresa May is still in charge. She has a “plan B” now: stop trying to find a compromise with the rival Labour party and get the EU to change the Irish backstop clause in the Brexit agreement.

The new plan looks rather vague: May promised to be more open with the parliament in negotiating the UK’s future relationship with the European Union, but no details or the planned steps were revealed.

British parliament vs the EU

Irish backstop was meant to avoid a hard border between the Northern Ireland (a part of the UK) and the Republic of Ireland (a part of the EU). British lawmakers hate this clause because they are afraid that it will make entire Britain oblige to the EU rules. The European Union, in turn, doesn’t want to change the backstop, although it’s ready to redraft the political declaration about the future ties. The EU will be clearly disappointed by the latest events that took place in the UK.

In the meantime, a couple of British lawmakers propose to force the parliament to a consensus approach to Brexit and, if that doesn’t work, to delay the exit day.

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All in all, the market now believes that a kind of Brexit compromise has become more likely. The form of the compromise is still in question. A finished deal (the Brexit deal ratified by all sides) or a second Brexit referendum will provide support for the British currency. On the other hand, if Article 50 is extended and the Brexit deal discussions continue beyond March 2019, this will prolong the uncertainty preventing the Bank of England from raising rates and making the GBP suffer.  

Another risk comes from the EU as it has already spent a lot of time and reached an agreement with Theresa May but now the British parliament has messed it up. May needs to make sure that Irish backstop will exist only during a limited period of time — this is something the EU is very against of. If the European Union isn’t willing to make concessions, the GBP will once again get in trouble.

What's the conclusion?

So far Theresa May has managed to avoid the destructive scenarios for the British pound. However, nothing has been really decided yet and the sterling is still on the line of fire. The currency will have some temporary support but without a breakthrough in negotiations both inside the UK and between the UK and the EU, it won’t be able to embark on a serious uptrend.

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