Monday 2 December 2019 3:33 pm IG Talk

Stubborn Boris could scupper 2020 GBP recovery

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Joshua Mahony joined IG in 2015 following a three-year stint as a market analyst in the Forex market. Features regularly in both written press and TV. Coming from an economics background, he has worked within Deutsche Bank and Barclays Capital investment banks. He holds both CFTe and MSTA technical analysis qualifications.

As we enter the final pre-election stretch, markets are faced with a number of potential consequences; from a Conservative-led Brexit, to a referendum and potential withdrawal of article 50 under a Lib/Lab/SNP alliance. However, one thing is for sure; there is a huge amount of uncertainty irrespective of the outcome.

Should Corbyn manage to enter Downing street, we are looking at huge economic upheaval, another round of Brexit negotiations, and a second referendum. The Brexit genie is well and truly out of its bottle, and so even in the event of a referendum which revoked article 50, you are sure to see a huge upswell in Brexit party support from disenfranchised voters. If the Conservatives were willing to call a referendum to hold off the moderate advances of UKIP, it is highly likely that a third referendum would ultimately follow as the Conservatives attempt to regain power and appease their pro-Brexit leanings.

Perhaps the more interesting part for FX traders comes in the event of a Conservative majority. With Boris Johnson having reached a deal with the EU, his promise to ‘get Brexit done’ signals a swift conclusion to the deadlock that is holding back economic growth in the UK. However, the fact is that any harder form of Brexit would – by its nature – require a substantial period of negotiations to replace the current relationship enjoyed by EU members. At the least that means another year of discussions over what that trade deal will look like. What markets will soon realise is that there is a direct trade-off between the length of the transitional period and the quality of that eventual deal. Markets hate uncertainty, but it is unclear whether they will like a half-hearted or failed trade deal any better. By promising to end the transitional period by the end of 2020, Boris Johnson is creating yet another rod for his back.

Markets do want an end to this current quagmire, yet they also want to see a good deal that will ensure the best access for UK businesses to the EU market. Thus, traders should be aware that the sterling surge expected in the event of a Conservative majority could be short-lived if Johnson sticks to this timeline. The focus will soon turn to the next stage of this process, with doubts over the possibility of reaching an all-encompassing deal within 12-months restraining sterling upside.

From Boris Johnson’s perspective, this process will likely look very similar to his recent push to amend the withdrawal agreement by utilising the threat of a no-deal Brexit. However, a trade deal doesn’t appear in the final few weeks due to the existence of a deadline. Instead, we could see EU negotiators utilise this deadline as a means to drive a hard bargain against their UK counterparts.

No one wants this process to be dragged out, and business sentiment has certainly been dealt a significant blow in response to the constant uncertainty that has loomed large over the course of this process. While we have seen low growth throughout much of the post-referendum period, the real economic damage only came once we approached the hard-Brexit deadlines (originally March). Without such a deadline, confidence in the UK should remain hopeful and optimistic. However, the imposition of such a hard deadline dents confidence and risks the UK being locked into a new relationship with detrimental terms of trade. Or worse, a no-deal Brexit.
Perhaps Johnson’s strategy is to win the Brexit vote by ensuring the offering also provides the swiftness promised by the Brexit party. However, if Boris is willing to favour brevity over quality, there is plenty of reasoning behind the notion that any post-election sterling surge could prove shorter than many have been predicting.

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