GBP optimism has yet to consolidate

The latest developments on the Brexit front have put the Sterling on the sideline following daunting reactions of EU leaders over a Brexit deal submitted earlier last week. Yet Thursday's meeting between British and Irish Prime Ministers Boris Johnson and Leo Varadkar boosted the British pound as a wave of optimism about an orderly Brexit increased. Although no further details of potential solutions concerning the Northern Ireland border have been revealed, the unexpected joint statement confirming “a pathway to a possible deal” should maintain GBP heavily solicited ahead of next week EU Council meeting starting next Thursday, a major event that should weigh on the Brexit fate.

Despite limited progress in the current Brexit impasse, both sides should resume talks today as well as during the weekend with debates probably focusing on a customs partnership solution that would allow Northern Ireland to exit the EU customs union with the UK while enforcing EU customs rules and tariffs on goods entering the region. Nevertheless, risks of a hard Brexit stay high as an exit proposal needs to be validated by EU leaders during the two-day summit starting on 17 October 2019 while UK Parliament special sitting on 19 October 2019 should either validate the deal agreed or request PM Johnson to ask the EU for another article 50 extension under the Benn Act. However, it is likely that, in this scenario, the British Prime Minister would bypass the appeal of MPs by sending two separate letters, the first requesting an extension and the second invalidating it, paving the way towards a no-deal Brexit. Following the GBP rebound, downside risk is likely to increase looking forward.