A big week­end for ster­ling with Brexit out­come guid­ing its for­tunes

The National - News - - BUSINESS MONEY - GAURAV KASHYAP Gaurav Kashyap is a mar­ket strate­gist at Equiti Global Mar­kets. The views and opin­ions ex­pressed in this ar­ti­cle are those of the au­thor and do not re­flect the views of EGM

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

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