image 4 1 - Rising risk of a hard Brexit?

Rising risk of a hard Brexit?

Prime Minister May’s resignation has clearly opened the door to additional uncertainties from now until the 31 October deadline. Rather than attempting to predict the exact outcome of Brexit, a more effective approach is to focus on the question of how a no-deal Brexit could actually occur. The consensus view is that May’s resignation increases the likelihood of either 1) a hard-line Brexiteer becoming Prime Minister and leading the UK towards a “no-deal” exit from the European Union (EU), or 2) a general election that paves the way for a potentially less market-friendly Labour government. In the near term, the selection process of a new Prime Minister is likely to be the main focus. With Boris Johnson the leading candidate to take over from PM May, we remain cautious on the near-term GBP outlook. Beyond this, the focus is likely to shift back to Brexit scenarios. What would it take for a no-deal Brexit to happen? We believe there are four ways this could happen: • The new PM calls for a general election or a referendum and, after securing a no-deal majority, lets the current 31 October deadline expire (Prob: VERY LOW) • Parliament fails to approve a deal, which eventually leads to the default outcome of no-deal exit on 31 October (Prob: LOW) • The UK could request an extension, which is then refused. The EU has previously demonstrated aversion to a no-deal scenario (Prob: LOW) • The new PM may pursue a hard Brexit, despite opposition from Parliament. This outcome would be a high-stakes political gamble (Prob: VERY LOW)

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Why does it matter?

In our opinion, a hard Brexit outcome is likely to threaten our bullish GBP outlook. While the Conservative Party leadership contest may lead to an increase in hard Brexit rhetoric, the new premier will face the same obstacles as PM May – especially Parliament’s opposition to a no-deal Brexit. Moreover, with a fragmented political environment and the latest polls suggesting no clear majority , it is hard to envisage the new PM would risk calling a general election avoiding the 2nd key risk to the GBP of a Labour government. GBP correction reflects rising risk of a hard Brexit scenario. We believe this risk may be overstated.

GBP/USD exchange rate.

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