{"id":5282,"date":"2018-07-09T18:28:31","date_gmt":"2018-07-09T18:28:31","guid":{"rendered":"https:\/\/blog-sg.forexanalytix.com\/?p=5282"},"modified":"2018-07-09T18:28:31","modified_gmt":"2018-07-09T18:28:31","slug":"uk-in-turmoil-what-next","status":"publish","type":"post","link":"https:\/\/www.forexanalytix.com\/blog\/uk-in-turmoil-what-next\/","title":{"rendered":"UK Politics in Turmoil, What Next?"},"content":{"rendered":"

The Macro Perspective<\/h3>
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It\u2019s been a very lively and busy few days in the UK. There are many scenarios and opinions flying about at the moment, but what do we make of the current situation? Let\u2019s take a step back and look at the facts.<\/p>\n

The UK narrowly voted to leave the European Union in 2016, by a vote of roughly 52% to 48%. Given that mandate, the UK government (and the whole nation) has since been divided into the \u201chard Brexit\u201d and \u201csoft Brexit\u201d camps, with the two sides each trying to get control. It\u2019s generally accepted that between the two scenarios, \u201chard Brexit\u201d is bearish for Sterling while \u201csoft Brexit\u201d is bullish.<\/p>\n

On late Friday, PM May secured an agreement within her cabinet for the direction of Brexit negotiations moving forward. May has always been on the \u201csoft Brexit\u201d side, having actually initially supported the \u201cRemain\u201d movement. The agreement includes among others:
\n\u2022 A \u201cMobility framework\u201d to be set up which will allow UK and EU citizens to travel, study & work in both areas.<\/em>
\n \u2022 A \u201cCommon rulebook for all goods\u201d within the EU, including agricultural products. The UK will apply domestic tariffs & policies for goods intended for the UK, but charge EU tariffs for goods that end up heading into the EU.<\/em>
\n \u2022 \u201cCo-operative agreements\u201d to be established between UK & EU competition regulators.<\/em>
\n \u2022 A \u201cJoint institutional framework\u201d when it comes to courts of justice (done in the UK by UK courts, and in EU by EU courts).<\/em><\/p>\n

We must note that this agreement is just the UK\u2019s preferred way moving forward. It still needs to be reviewed and agreed by the EU, and it\u2019s merely the first small step towards reaching an agreement between the UK and EU. If the EU reject this proposed agreement then we will be back to square one, but until then we should treat this as a positive development.<\/p>\n

David Davis, the head of Brexit negotiations, was always considered to be more on the \u201chard Brexit\u201d side (as was his deputy Steve Baker). As a result of this cabinet agreement \u2013 and the other side effectively taking control of the process \u2013 Davis resigned along with his deputy. This move has been characterised as a \u201chammer blow\u201d for May, and generally a very negative event, but it was practically unavoidable following the cabinet vote \u2013 so we don\u2019t think it should be a big surprise. Davis is replaced by Dominic Raab, a pro-Brexit supporter and former housing minister. He seems to have good support from May and the cabinet, and we now need to wait and see what his approach is.<\/p>\n

As if the above developments weren\u2019t enough, we saw yet another important move on Monday as Foreign Secretary Boris Johnson also resigned. Johnson had also been a vocal advocate for a \u201chard Brexit\u201d, constantly claiming that the UK would need to have a clean break from the EU as dictated by the British people via the referendum. Again, this shouldn\u2019t have been a big shock, and neither should we think that it will be the last resignation within May\u2019s government. As the two camps remain divided and the \u201csoft Brexit\u201d route seems to have been chosen going forward, the \u201chard Brexit\u201d supporters will likely feel increasingly uneasy with their position.<\/p>\n

The big risk will undoubtedly be that May\u2019s slender majority gets eroded and a new round of elections is forced. In such a scenario, what would the most possible election outcome be? Jeremy Corbyn\u2019s Labour party has been slowly gaining ground, but the Conservatives would probably be victorious once again \u2013 let\u2019s not forget that for the past 2 years the British people have had an opportunity to further assess the potential \u201chard Brexit\u201d impact, and it\u2019s quite possible that there has been a realisation that it could be particularly damaging for the UK.<\/p>\n

The chances of a Conservative election victory would probably increase substantially if PM May stepped down and a new PM was appointed in her place. In fact such a move would probably be the best way to restore confidence in the Conservative party after May\u2019s undoubtedly poor handling of the Brexit process so far. Her approval ratings are at all-time lows and she may be forced to make such a move in the very near future. If such a move is made, then the selection of a new leader would be absolutely crucial for them.<\/p>\n

Now, where does all this leave us? Let\u2019s think about the two potential scenarios that were always going to be in play: the \u201csoft Brexit\u201d and the \u201chard Brexit\u201d. What we have seen unfold in the past few days is the beginning of the \u201csoft Brexit\u201d scenario. So, I find it very difficult to turn bearish GBP on the back of what has just transpired, even with the increased political uncertainty.<\/p>\n

I remain bullish as the main source of GBP weakness since 2016 has been Brexit uncertainty, and specifically the \u201chard Brexit\u201d scenario (the BoE has repeatedly stated this in the past year). What we are now seeing is the first step aiming at removing this uncertainty, and this in my opinion can only be a positive for the Pound.<\/p>\n<\/div><\/section>
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Stelios Kontogoulas<\/p>\n<\/div><\/section><\/p><\/div>

The Technical Analysis Perspective<\/h3>
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The GBPUSD has retraced nearly 50% of the post BREXIT lows to the highs this spring. The recent double top completed when we traded towards the 1.3050 level and has since bounced higher out of a descending wedge. This is constructive near term as long as we are above the 1.3050 level, but please note we just stopped on the 9th<\/sup> of July at the 24% retracement at 1.3360.<\/p>\n<\/div><\/section>
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Blake Morrow<\/p>\n<\/div><\/section><\/p><\/div><\/p>\n