Brexit update: Johnson hits the ‘refresh’ button
Our central scenario of an extension to the Brexit deadline followed by elections has materialised; this is now the path ahead. Indeed, the EU granted a ‘flextension’ until 31 January 2020, in line with the UK’s request. Early elections have been called for Thursday 12 December, on prime minister Boris Johnson’s insistence that parliament needs a “refresh” after “unrelenting parliamentary obstructionism”.
This is in line with our central scenario, given we had put little weight on Johnson’s threats of a no-deal Brexit. We believed that new elections were the only way out of the current impasse and that elections would be preferred over a new referendum.
Johnson’s Tory party appears ahead in opinion polls and seems to have favourable momentum, although the UK’s elections are notoriously tough to forecast, and the first-past-the-post electoral system muddies the mathematics.
At this stage we keep our central scenario that a workable majority for Johnson’s deal could emerge, and his deal negotiated in October 2019 will eventually be ratified.
This is not the end of the Brexit story, nor the UK economy’s, as the future trade relationship still needs to be ironed out once a divorce deal is secured. In the meantime, the economy continues to suffer, and could still suffer more, even with Johnson’s promise of stepped-up fiscal policy (there will be a lag).
We still see a Bank of England rate cut in the pipeline, but we move it from October 2019 to February 2020 (by then, a new Governor will be in place). We note that some policymakers have voiced support for more easing lately, reinforcing our big-picture scenario that more easing rather than more tightening will come next.
Overall, we continue to see political uncertainty as a key hurdle for business investment. Such an environment does not favour strong appreciating pressure for sterling, at least next year.
Nonetheless, the UK elections may somewhat reduce political uncertainty, which should prove supportive of sterling. We have therefore changed our three-month projection to USD1.30 per GBP. However, we fail to see reasons for a material appreciation of sterling in an environment of ongoing economic and political uncertainty. The six and 12-month projections are left unchanged at USD1.30 and USD1.31 per GBP, respectively.
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