The UK is scheduled to officially leave the EU on Friday. Following the Brexit referendum in 2016 and years of tense negotiations and political turmoil in the UK, Prime Minister Boris Johnson finally secure parliamentary approval for a Brexit deal earlier this month. This means that the UK will now finally close the door on 43 years of EU membership.
What will happen on the day?
While there has been a lot of talk of national celebrations the only scheduled happenings on the day will be countdown clock which will be projected onto 10 Downinst Street (the PM’s residence) along with a celebration in parliament square led by the Brexit Party leader Nigel Farage. Interestingly, the events of the day will be a far cry from the ceremony held when the UK joined the EU in 1973, which included a torchlight procession.
What will change on the day?
Ultimately, life for UK citizens will remain exactly the same. The Brexit date is merely a legally binding formality within the overall Brexit process. The UK will remain inside the single market and customs union until the end of 2020.
So what happens next?
The Brexit date is important because it marks the official start of the UK’s transition period with the EU. The transition period allows for the UK and EU to negotiate the terms of future trade. The UK is hoping to agree to a trade deal with the EU ahead of the December 31st deadline. However, Johnson has warned that if a deal is not ready in time, he will not extend the deadline period and is instead prepared to leave the EU without a trade deal.
How does this impact the Pound?
GBP has been relatively muted over recent weeks. Following an initial break higher in response to news of the UK elections result in December, GBP has softened as data weakness and dovish comments from the BOE has seen an increase in uncertainty regarding BOE monetary policy. There is now an increased risk that the BOE will need to cut rates in order to help backstop the economy which was damaged by prolonged uncertainty over Brexit. Indeed, BOE governor Carney recently warned that despite the Brexit deal, a post -Brexit pickup might not materialize this year.
Risks For GBP
The path for GBP is now uncertain and with tail risks due to increase as we move through the year, heading closer to the transition phase deadline. The “deal or no deal” uncertainty which weighed on GBP for most of last year looks set to take on a similar role this year. There are upside risks, however. If trade talks progress well and it looks like a deal is forthcoming, this should take a lot of pressure off GBP and also the BOE.
For now, GBPUSD continues to trade between the 1.2978 level support, underpinned by the local bullish trend line, and resistance at the 1.3375 level. Price action has stagnated recently though dovish risks for the upcoming BOE meeting this week raise the risk of a drop-down to next support at the 1.2793 level.