It had been a stellar run-up to the UK election for the Pound exchange rate, with gains across the board. But since the initial election euphoria, markets have come back down to earth.
Not only does the UK face another year of uncertainty, but there are also two new Brexit deadlines in play. One will be the obvious end of year election when the UK is supposed to officially end its transition period. The new Conservative government has stated it won’t extend the UK’s stay in the EU beyond this point, so the UK could face a no-deal or cliff-edge departure by the close of 2020. This would leave the UK floundering and adopting World Trade Organisation rules–something that could put pressure on the Sterling exchange rate and the economy.
But before that, markets have another reason to be concerned. According to EU insiders, June is the last month where the UK can request an extension. The withdrawal agreement states that the transition period could be extended by ‘one or two years’; however, the likelihood would be a cost implication, and the UK would be committed to contributing to the EU budget.
Boris Johnson has previously used Canada’s deal with the EU as an example of something the UK could have. However, the deal between the EU and Canada took seven years to finalise, and Boris is attempting to organise something similar within 11 months. If we approach June and the British PM still refuses to extend and talks haven’t made significant progress, Sterling could be in for some volatility until some clarity is reached. JP Morgan has suggested the odds of a no-deal Brexit are ‘uncomfortably high’ citing a 25% risk, a 20% chance of a transition extension, and 50% chance of a deal being made.
Overall, the Pound, UK economy, and political landscape have quite a year ahead. After years of uncertainty, recent events have shown how clarity can bolster the British Pound. Market cheer may be back again should the core EU agreement be established.