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GBP : Hard Brexit

(Fri, 3 July 2020). Without an extension in place, the UK is on a path to formally Brexit in a ‘hard’ fashion: without a new EU-UK trade deal. The end is nigh? Not quite. The context in which this is occurring – against the backdrop of the coronavirus pandemic – means that even a late request for an extension to the transition period is likely to be granted. Retail trader positioning sees conflicting signals among the majors GBP-crosses.

 

NO EU-UK TRADE DEAL, FOR NOW

The British economy is in duress owing to the pandemic-driven recession and market participants are becoming anxious over whether or not Brexiting as fast as possible is the best path forward. The key June 30 Brexit transition period extension request deadline has now passed, leaving the British Pound in a greater state of uncertainty as the COVID-19 outbreak continues to weigh on global growth prospects.

Now that the June 30 extension request deadline has come and gone, we see ourselves on a path where a hard Brexit is once again a distinct possibility. And that creates an environment where volatility in the British Pound takes on a bias tilted to the upside.

If we do see a rise in volatilitythe backdrop of the Sterling and local assets will shift materially. With general risk aversion high and in some regards still rising across the globe, this situation would lead us to the opinion that the British Pound is likely to be treated as a more at-risk currency and underperform relative to other currencies.

 

HARD BREXIT ON THE HORIZON

Now that the self-imposed deadline for an extension has passed and the UK has not received an extension from the EU, then in theory, the time horizon has solidified for a full Brexit (of the hardest variety: retaining access to the EU via World Trading Organization (WTO) rules).

If the EU and the UK are unable to reach an agreement before the end of 2020, then we are looking at a situation where the UK will lose all of its access to its privileges and it will be treated as if it were a brand new country, meaning it would be treated as if it were subject to WTO. The UK would have to pay substantial taxes, higher tariff rates and the cost of goods coming into the UK would increase significantly – all of which would hurt British businesses and households.

What does this mean? There is nothing stopping the EU and the UK from negotiating for a new extension. True, this is an agreement between people; we’re not dealing with the laws of nature, i.e. gravity. The context in which this is occurring – against the backdrop of the coronavirus pandemic – means that even a late request for an extension to the transition period is likely to be granted.

But with each passing day, the uncertainty around the British Pound will grow a little bit more, increasing likelihood of there being a much more volatile outcome for the British Pound – for both bulls and bears.

 

 

 

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