October 31st Deadline Still Active
The October 31st Brexit deadline is right around the corner and it is safe to say that this really is a case of “Trick or Treat”. Last week was a frustrating one for the UK and also for markets. In a vote on the PM’s Withdrawal Agreement Bill, the PM was eventually successful in gaining parliamentary approval for his deal. However, in the second vote, which was on the express passing of the bill (to allow for the October 31st Brexit) MPs voted against Johnson.
Johnson Requests Delay
In the wake of that parliamentary defeat, Johnson was instructed by the Benn Bill legislation passed by MPs last month to request an extension to the Article 50 deadline. After some deliberation, which unsettled GBP, the extension request has now been approved by the EU. However, the EU has not yet said what the new deadline will be. In light of this, uncertainty remains around whether the deadline will be sooner than the January 31st, 2020 deadline set out in the Benn Bill, or later.
Given the confusion and division which remains, if the EU offers a deadline within the next month or so, this will likely be bearish for GBP. The reason being is that the chances of MPs agreeing on delivering Brexit in that timeframe remain very slim. This raises the risk once again of a no-deal Brexit. However, if the EU agrees to the 3-month extension or offers a later deadline, this would likely boost GBP. This would allow more time for MPs to work on agreeing to deliver Brexit. Furthermore, the chances of a no-deal outcome would be reduced, offering further support.
While the dynamic seems fairly straightforward, the situation has become more complex due to developments within the domestic political space. PM Johnson is now pushing for early general elections ahead of Christmas. However, to call these elections he would need parliamentary support with Jeremy Corbyn (leader of the opposition). Corbyn is so far saying he will not offer support for elections unless the prospect of a no-deal is taken off the table.
If we see these elections happen, they will have a further impact on the Brexit outlook. Clearly, at this stage, a Conservative government would likely press ahead with a no-deal Brexit in order to get Brexit done. On the other hand, a Labour government would very likely hold a second referendum which raises the prospect of Brexit being cancelled altogether. If we see a hung parliament (which appears most likely) then the current quagmire will continue and Brexit will likely be delayed again.
However, there has been another plot twist as UK newspaper The Guardian is reporting that a group of Remainer MPs are planning to take over the Commons Agenda (in the same way that was done to pass the Benn Bill) next week to allow for a parliamentary vote on holding a second referendum. If successful, this could once again raise the prospect of Brexit being canceled if the public is given a second vote.
Macron Threatens Veto
Over the weekend, we have also seen the emergence of a new factor. French Prime Minister Emmanuel Macron has said that he will veto any extension to Article 50 (thus forcing a no-deal Brexit by October 31st). He will do this if Jeremy Corbyn doesn’t agree to support elections or if parliament doesn’t ratify Johnson’s Brexit deal. Macron has given Monday as the deadline for this ultimatum.
Clearly, there is plenty to watch this week and the risk of volatility is extremely elevated. GBPUSD recently broke out above the bearish trend line from year to date highs, though reversed just shy of testing the 1.3032 level. The rest of 1.2771 has held as support for now keeping the focus on further upside. Above 1.3022, the next zone to watch is the 1.3297 level. However, if price breaks back under the bearish trend line, 1.2487 is the next support to watch.