Sterling has again hedged higher in today’s session, helped along by better-than-expected UK GDP data, but volatility is likely to remain elevated given background of mounting political uncertainty.
The GBP/USD cross jumped to 1.236 – its high since end-July – while GBP/EUR temporarily breached 1.12 after the release of data showing GDP growth of 0.3% mom in July assuaged fears that the UK economy may go into recession in Q3. While GDP was flat in the three months to July, analysts had forecast a small contraction in the month of July.
But these data are likely to quickly play second fiddle to Brexit-related developments. A bill forcing the government to seek from the EU a 3-month delay in the UK’s departure to the EU went through the upper house of parliament on Friday without amendments and is expected to become law today. At the same time, a government-sponsored bill to bring forward a general election is once again unlikely to command a parliamentary majority.
The net result is that Boris Johnson’s government will likely have to ask the EU to once again extend Article 50 negotiations and Sterling price action points to markets having indeed grown more confident that the UK will not leave the EU on 31st October without a deal. However, a key question remains namely where the EU will once again agree to a time extensiondespite the British government seemingly not having a comprehensive plan B to the controversial Irish backstop. The EU could conceivably agree to a further delay (to 31st January 2020) but only if this is to allow sufficient time for the government to schedule a fresh general election, call a second referendum or revoke Article 50 altogether. This issue may remain unresolved in coming weeks, particularly as parliament is due to go into recess until 14th October.
