A big weekend for sterling with Brexit outcome guiding its fortunes

It’s a key week with Brexit negotiations set to reach its climax this weekend – a story we have been tracking for more than three years, which now comes down to a matter of days.

While discussions between the UK and the European Union have intensified over the past few days with slight positivity, concessions still remain.

As officials desperately stretch to reach a middle ground before the EU Summit, which takes place tomorrow, the issue of the Irish backstop has hindered any real progress.

The two-day summit is not regarded as a forum for further negotiation, but more of a way to agree and approve the withdrawal agreement before Prime Minister Boris Johnson returns to the UK from Brussels on Saturday to head an emergency meeting with his members of parliament to get the deal passed.

It will be the first parliamentary sitting on a Saturday in more than 37 years and only the fourth time in UK’s history on a weekend. It will be at this emergency session that UK MPs will agree or reject any deal presented to them by Mr Johnson and his team of negotiators.

While it remains to be seen whether the latest proposal is approved or rejected, we know by law that Mr Johnson must ask for another delay (under the Benn Act) if no deal is approved by UK MPs. This also applies if they have not agreed to a hard Brexit either.

It is very difficult to predict outcomes heading into the final stretch but an extension looks likely, which would ultimately result in a collapse of the government.

In the event a deal is passed and Brexit takes place on October 31, this could be positive for sterling assets heading into the final months of the year. In the unlikely event parliament cannot agree, and Mr Johnson tries to sidestep the Benn Act and force a no-deal, this would cause the most volatility in GBP assets and the most damage for future pound prospects.

The most realistic outcome at this stage – an extension – would see volatility in the near term, before prices stabilise and continue to trade in the current ranges. In the next few days, however, expect moves to be sharp in GBP crosses, with near-term resistance kicking in at 1.22 levels and 1.19 levels strongly tested and likely to hold in a worsecase scenario.

Along with Brexit, there was a restart of trade talks between China and the US this week, as a round of US tariffs on Chinese goods are set to kick in at the end of the year. While both countries appear optimistic of a deal, nothing has been confirmed and the devil remains in the detail. Both parties do seem open to negotiation – China gave up some ground this past week on the purchase of agricultural products – so what concessions will be given remains to be seen. Tariffs on $250 billion (Dh918 bn) worth of Chinese goods, which were scheduled to increase from 25 per cent to 30 per cent this week, will be pulled, so watch for positive developments.

While Brexit and the trade war are enough to drive volatility throughout the month, I am also keeping an eye on the European Central Bank rate decision, due out next week, along with the US Federal Open Market Committee meeting on October 30.

I maintain that future central bank policies will be the key theme ahead – along with the reversion from hawkish to dovish policy – however, all eyes will be on Brexit for the immediate future.

It will be at this emergency session that UK MPs will agree or reject any deal presented to them by Mr Johnson