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Markets Await Johnson Statement, Euro and Dollar Fall Further

Johnson

Above: Boris Johnson. File image. © The Naked Ape. Accessed Flickr, reproduced under Creative Commons licensing.

"With a narrowing set of options, No 10 is considering radical alternatives to avoid another delay, including defying the new law."

- Pound-to-Euro exchange rate: 1.1082

- Pound-to-Dollar exchange rate: 1.2232

- Could Johnson resign today?

- Brexit delay almost certain

- But uncertainty still not vanquished

Foreign exchange markets await an official public statement from Prime Minister Boris Johnson today, the outcome of which should determine whether the current period of recovery in Pound Sterling extends.

Media reports out Thursday suggest Johnson will make a statement at some point during the day. "PM will directly address the public today," says Paul Brand, Political Correspondent at ITV.

Brand says a No. 10 spokesperson stated “Jeremy Corbyn has led a drive by Parliament to back a “Surrender Bill” that stops us delivering Brexit, and is also cowardly running away from an election”.

According to the Financial Times, Johnson will use a speech on Thursday to challenge opposition Labour leader Jeremy Corbyn to "go back to the people" with a General Election to break the Brexit deadlock in the UK parliament.

The speech comes as Johnson is effectively taken hostage by parliament: he has no majority with which to pass laws, the Speaker of the House is hostile to the Government and has ultimately put back-bench MPs in control of the agenda; at the same time Parliament has refused to grant a fresh election before the October 31 Brexit deadline.

The developments have proven supportive for Sterling, which has extended its mid-August rally further.

"Boris Johnson's recent defeats should almost inevitably lead to a temporary recovery of the British Pound, at least for the time being. A second referendum might indeed be a conceivable scenario," says Marc-André Fongern with MAF Global Forex. "In any case, a further delay would undoubtedly have a significant impact on the UK economy, whereas the global slowdown has already left its mark."

Having vowed to not ask for a Brexit extension, a law designed to force the Prime Minister to delay Brexit is expected to land in his lap on Friday night, after it has been rubber-stamped by the House of Lords.

"With a narrowing set of options, No. 10 is considering radical alternatives to avoid another delay, including defying the new law," says Francis Elliot, at The Times.

The Prime Minister offered a sizeable hint that he might stand down rather than be frog-marched to Brussels by parliament, saying in parliament on Wednesday:

“If I am still Prime Minister on Tuesday October 15, then we will leave on October 31 with, I hope, a much better deal.”

From a currency market perspective, we believe how Johnson responds could be significant: a resignation cannot be ruled out at some point over coming days and week. Such an outcome would ultimately pave the way for a caretaker Prime Minister to head to Brussels and deliver the UK's request for another Brexit extension, thereby allowing Johnson to keep a steadfast promise that he will not ask the EU for another delay.

A negative outcome would be Johnson opting to push the constitutional boundaries further and seeking to thwart the passing of the bill: how this might be achieved is not clear, and we will keep a close eye on political developments. 

For now, analysts suggest there is further short-term recovery potential in Sterling.

"Sterling has been buffeted by the frenetic pace of events in Parliament over the last couple of days. Removing the immediate threat of a no-deal Brexit has helped the pound recover some of its recent weakness. If, as we expect, Brexit is delayed until January 2020 and an election is held after October, we would expect this recovery to continue," says Dean Turner, Economist at UBS AG.

"If, as we expect, Brexit is delayed until January 2020 and an election is held after October, we would expect this recovery to continue. GBPUSD could rally above 1.30," says Daniel Trum, a foreign exchange strategist with UBS. "A deal could even bring it to 1.35."

For the Pound-to-Euro exchange rate,  UBS say a Brexit delay until January 2020 could see 1.15 reached, and the upper 1.25s are possible in the event of a deal being struck.

"Sterling has been buoyed by Boris’s suffering, but event risk remains high," says Neil Wilson, an analyst with Markets.com. "GBP/USD has pushed to a weekly high but ran into resistance at 1.2260. The pullback needs to find support around the round number 1.22 level and then retest 1.2260 to suggest there is sustainability. Bulls’ big target is the late August swing high at 1.230. Bears will look for the area around 1.2150 to be taken out on the downside."

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Brexit Delay Only Offers Sterling Limited Support

Sterling has over recent days rallied on the prospect of a 'no deal' Brexit being neutralised by parliament, the actual enacting of the delay would likely see the gains in the currency cemented and extended.

However, we do not expect gains to be substantial and long-lasting as a delay does not answer the crucial questions facing British politics.

"If legislation is passed this week that would rule out a no deal Brexit, the pound can be expected to rise. If it were decided that the Brexit deadline were to be extended but that the legal default position of the UK remained that a no deal Brexit could still take place at a future date, GBP may also rise, but by a lesser amount – since kicking the can down the road is not a solution," says Jane Foley, a strategist with Rabobank in London.

Once the legislation for a delay has been passed, we expect the Labour Party and other opposition parties to back a General Election.

Monday is the final day this can be achieved as Parliament is suspended from this point.

So in all likelihood, we are heading for a General Election that will fall sometime after the Brexit delay is granted, which therefore means anytime after October 17 which is when the European Council meets.

From here, further unknowns arise: what will an election throw up, what kind of government will form, and what will their policy on Brexit be?

Uncertainty has been delayed by recent events, but it has not been eliminated, and as such we would expect Sterling's strength to remain shallow.

Indeed, downside risks remain elevated.

"Worst case scenario for the GBP: Boris succeeds with no deal Brexit on 31st October, then loses a General Election to Corbyn. I think in that scenario you couldn’t even confidently say parity is the bottom," says Joshua Raymond, Director at London-based broker XTB.com, referencing where the Sterling-Euro could go in a worst-case scenario.

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