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What now for Boris and sterling after UK Supreme Court rules prorogation unlawful

The highest court in the United Kingdom has landed a fresh blow for Prime Minister Boris Johnson after it ruled that the government’s decision to suspend Parliament was unlawful. The surprise ruling cut Johnson’s trip to New York short where he was hoping to meet his EU counterparts on the sidelines of the United Nations General Assembly to speed up progress in the Brexit negotiations. But following the Supreme Court’s decision, it’s unclear whether Johnson can stay on as prime minister and the odds of a general election soon have shot up. The pound has edged up slightly on the news as a snap vote could help ease the current turmoil in Westminster. 

Things just going from bad to worse for Boris

Johnson has probably had one of the worst starts to his premiership than any British prime minister in history, losing his working majority, being blocked by lawmakers to pursue a no-deal Brexit and his decision to suspend Parliament being ruled illegal. All this just weeks after taking office.

Yet, ironically, these events may also have boosted the chances of a Brexit deal as the only way for Johnson to restore credibility in his administration is to reach a revised exit deal with the European Union. Striking a deal would also be positive for his prospects of winning a snap general election, which looks almost inevitable now. The question is, will Johnson fight on and see through Brexit with or without a deal as planned or will there be elections before October 31?

The Supreme Court’s ruling means Parliament will likely be reconvened immediately, and Johnson is expected to face even fiercer opposition by MPs to his Brexit plans. The prime minister has previously suggested he may not request to extend the October 31 deadline despite being bound by law to do so as he desperately tries to keep the threat of a no-deal alive to pressure the EU into last-minute concessions.

Is a revised Brexit deal getting closer?

His strategy may be working as the EU has softened its stance and re-engaged in talks, even signaling a willingness to remove the backstop from the Withdrawal Agreement if Britain can come up with a viable alternative. Although, following the ruling on proroguing Parliament, Johnson might be less inclined to risk breaking the law and it’s becoming increasingly apparent that his best and perhaps the only way out of this mess is to strive for a deal with his European partners.

However, assuming that Boris isn’t somehow forced to resign, or Labour leader Jeremy Corbyn doesn’t change his mind about agreeing to a general election before October 31, how realistic is the prospect of a new Brexit deal by the next EU summit on October 17-18?

The UK has yet to submit concrete proposals for an alternative arrangement to the Irish border backstop, with the EU’s chief negotiator Michel Barnier saying on Tuesday, “I see no particular reason today, to be honest, for optimism”. If leading up to the October summit, the Johnson government has still not managed to produce adequate enough proposals that satisfy the EU’s criteria, another extension will become unavoidable.

Not a lot of trust in Johnson

It’s worth pointing out that the EU is mistrustful of Johnson and some think he is just playing for time so he can put the blame of a disorderly Brexit on the bloc. Market participants are also wary of the latest signs of progress and despite the pound’s impressive rally since early September, the currency is still down almost 7% from its 2019 peak versus the US dollar.

But as long as no-deal remains off the table and the UK and the EU are talking, the pound will likely be able to hold on to its recent gains and could even stretch them if further progress is made in the negotiations and, most importantly, the UK isn’t thrown into a political vacuum. The next key target for a rebounding pound, should a deal start to move closer, is the 50% Fibonacci retracement of the March-September downtrend at $1.2670, followed by the 61.8% and 78.6% Fibonacci levels at $1.2838 and $1.3078, respectively.


An early election may not break Brexit impasse

The possibility of an early election has also been supporting sterling as a Labour-led government is seen ruling out a no-deal Brexit. Corbyn is pledging to renegotiate a Brexit deal within three months and hold a second referendum within six months after that should Labour win a general election. However, voters are not too impressed with Corbyn’s muddled Brexit policy and the party is sharply trailing the Conservatives in opinion polls. One poll even has Labour being overtaken by the Liberal Democrats, raising fresh doubt about Corbyn’s own future as party leader.

It’s highly unlikely therefore that Labour would win a majority and if Johnson was also not able to secure a commanding victory, a coalition of either Conservatives/Brexit Party or Labour/Scottish National Party would be the most probable outcome. However, even if the Tories or Labour were to succeed in forming a coalition with smaller parties, the splits over Brexit would not go away easily and the political deadlock could endure for a while yet.

Pound’s troubles far from over

So where does all this leave the pound? The best immediate outcome for pound bulls is for the UK and the EU to agree on a deal. Failing that, an extension is the next likely scenario. But this would bring with it a whole host of new uncertainties given the present political climate in the UK. The Bank of England has already started worrying about the impact of a very prolonged period of Brexit limbo on the economy. Should the central bank turn dovish in the coming months, this could weigh significantly on GBP/USD against a backdrop of more drawn-out negotiations and political posturing.

Negative developments are likely to see GBP/USD falling below its latest uptrend line to hit the 23.6% Fibonacci at $1.2294. Slipping below this level would erase GBP/USD’s current positive momentum and bring back into range the three-year low of $1.1957 hit earlier this month.

Of course, the possibility of a bigger crisis erupting before the October 31 deadline cannot be ruled out, such as Johnson proroguing Parliament again or deciding to ignore the legislation that compels him to seek an extension. Such events would raise new constitutional challenges for the UK, throwing the country deeper into turmoil. Hence, GBP/USD’s troubles are far from over and traders should be braced for a turbulent five weeks.


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Disclaimer:
This information is not considered as investment advice or investment recommendation but instead a marketing communication. This material has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and that it is not subject to any prohibition on dealing ahead of the dissemination of investment research.


Source: XM

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