Our Opinion: 2019

Brexit Breakthrough?

EU and UK negotiators have agreed on the draft text for a revised withdrawal agreement. European Commission President Jean-Claude Juncker said, “Where there is a will, there is a deal – we have one! …I recommend that (the EU summit) endorses this deal.” British Prime Minister Boris Johnson said: “We have a great new deal that takes back control.”

Sterling has had a volatile session, reflecting the fact that further twists and turns in the Brexit story are likely in the next few days.

Amid the optimism, it is important to remember that parliamentary ratification is far from certain.

Support for the revised agreement from Northern Ireland’s Democratic Unionist Party, which is likely to be needed to get the deal over the line, has not been forthcoming. There is also the question of how many Labour Party MPs will back it, many of whom will be needed for the deal to be ratified.

At the special parliamentary session scheduled for tomorrow (Saturday), MPs will have much to ponder. Efforts to get the DUP on board for the deal will likely continue. Pressure on MPs may be increased if the EU rules out another extension (something Jean-Claude Junker mooted in a comment to the press). The success or otherwise of efforts to put this revised agreement to a referendum could also have a bearing.

Given the divisions, it is hard to have any confidence in forecasting Saturday’s outcome. On balance, I would side with the view that the deal is going to be rejected and an extension requested.

What seems less likely now than at any other time in the last few months is what investors feared most, the outcome that would have had the largest negative economic impact: a no-deal Brexit. If parliament does not ratify the deal and a General Election is called, Johnson will likely campaign on a platform of securing this renegotiated agreement. The opposition Labour Party, for its part, will likely court the voting public on the basis of putting the new agreement to a second referendum.

While the ultimate outcome remains uncertain, Sterling looks good value. If a convincing deal is reached, Sterling could rally to 1.35 against the Dollar. If the deal is voted down by British MPs and there is an extension followed by a General Election, it is likely to settle between 1.26 and 1.32. The no-deal Brexit scenario, which threatened to send the exchange rate as low as 1.12, now appears less likely that it has for some time.

Alexander Wade

18th October 2019