Don't forget about the Brexit

Between the latest Covid-19 numbers and all the economic related worries, there is also another event which is right around the corner. I'm speaking about the "still" unsolved Brexit clinch between the EU and the UK.

The UK premier minister Boris Johnson already declared a deadline for the negotiations for the 15th October, so just two weeks from now.

If until this date there is no agreement between the two parties there will be no other deal at all, as the prime minister announced back in August. The UK will then try to look forward and implement rules on their own, without any kind of deal with the EU.

In this week we also saw the EU suing the UK and Boris Johnson for breaking the Brexit contract or the "terms of the Brexit divorce deal". So overall a bad starting position for a last minute deal at all.

A no deal scenario could force the UK into a pretty bad situation, especially in the middle of a global pandemic and huge economic worries, which aren't solved at all.

But whether it's part of Johnsons strategy or not, he continues to insist on his position and currently sees no willingness to compromise.

An outlook into the glas bowl is quite impossible but it is possible to estimate what might happen in the respective scenarios:

Last minute deal

At the moment I think this one is the more likely outcome. The EU has just been too gracious for that in recent years. A positive outcome could help the pound to break out of its range.

A weaker dollar could of course benefits this scenario. So probably a case for after the election, cause momentarily a stronger dollar would be in my view more likely because of a lot of uncertainty in the markets.

No deal

I guess this scenario would be pretty bad for the pound. As I mentioned earlier, the pound is moving in kind of a range at the moment. Therefore the pound could at least fall further to the 1.22 USD level. Further restrictions in the UK, because of rising Covid cases would benefit this scenario too.

But the EU is the EU and in my opinion a short-term arbitration is still possible and on the table. A further delay and also an extension of the contract definition period beyond 2020 would also be a possibility, especially because of the corona situation.

Nevertheless the Pound is for now untradeable and since the upcoming actions cannot really be estimated, I am currently also keeping my fingers off the pound until I get more clarity about the fundamental situation.

british pound outlook october Lukas Kuemmerle