When Theresa May stepped down as Prime Minister of the UK, she was succeeded by Boris Johnson as the head of state. She left the position with weary eyes after she’s been through two votes of no confidence and her proposed Brexit deal was voted down by the British Parliament on almost ten occasions. Unlike Theresa May, Boris Johnson who now holds the reins of power in British politics was more than happy with these developments. BoJo as Johnson is often referred to, left his previous position as Foreign Minister in Theresa May’s administration just in time to avoid the shadow of a failed negotiation with Brussels hanging over him. His strategy was ultimately successful, since the May administration’s indecisiveness ended up losing a lot of their credibility both domestically and internationally.
Johnson, who’s believed to also have the support of the US President, has begun preparing for the real possibility of a no-deal Brexit. His momentum was slightly hampered when his reception in Scotland and Northern-Ireland was less than enthusiastic. He also faced outright rejection in Berlin, Paris and Brussels. The European Union has no interest in changing the current Brexit deal, especially since Johnson wasn’t able to present a convincing argument for amending any of the terms. If both parties are unwilling to give, then the possibility of the UK leaving without any sort of deal is highly likely and the GBPUSD’s movements closely reflected that sentiment. Back in June the cable had was still flirting with the 1.2750 resistance line, but following Johnson’s election it started slowly sliding downwards. Prices even went below 1.25 and didn’t stop there, falling 300 pips when Johnson centered his message on the possibility of a no-deal Brexit.
After Johnson started facing pushback from the opposition in the Parliament, his solution was to ask the Queen to extend the Parliament’s autumn recess. Elizabeth II had no intention of getting caught up in political games, so she quickly approved his request. Given that Parliament only had 2 weeks until recess and only had another 2 weeks afterwards until the exit date, this strategy would give Johnson more room for movement to attempt to either negotiate or prepare for a no-deal Brexit.
Stifling the Parliament seemed to be the last for Forex traders and the cable finally hit 1.200, which seemed unreachable since 2016. The only time it was that low after 1985 was in the immediate aftermath of the Brexit referendum when confidence in the pound hit an all time low.
All the uncertainty surrounding Brexit also had an effect on the Euro as well as other European currencies. The EURUSD broke 1.10 causing brokers to go into a minor panic. Currency market movements suggest that market participants agree with the Bank of England forecasts. According to the London based central bank, the UK’s GDP is likely to drop by 1.8% should they leave the EU without any kind of agreement. It may even cause a recession that could ripple into other countries with close economic ties to them, including EU countries. The country that could be most affected is Ireland of course, but the prospect of a no-deal Brexit could be bad news for Germany and the Benelux trio, who could themselves face a drop of 0.6-1.2% in the following year. Such a sharp drop in GDP is the last thing the ailing German economy needs. Their growth rates for both the third quarter of last year and the second quarter of this year were at -0.1% which could be a sign of a coming recession. Germany is often considered the primary engine for Europe’s economic growth, so if their economy were to tank most of Central- and East-Europe would feel the impact as well.
The chaos in the British Parliament was causing the rest of Europe to worry as well, until Johnson’s no-deal exit proposal was blocked in the House of Commons with the help of 21 rogue representatives. With that option off the table for now, it could result in new elections that may postpone the deadline even further. They might not be closer to Brexit than they were under the previous Prime Minister. May receive a lot of criticism for her inability to negotiate a successful deal, but hopefully seeing her successor struggle with the same impossible task will at least bring a smile to her face.