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Crunch time: what might Johnson’s last ditch attempt at a Brexit deal mean for financial markets?

European union and British Union jack flags flying together. Brexit concept

With Boris Johnson making his last-ditch attempt to strike a deal with the EU, Giles Coghlan, Chief Currency Analyst at HYCM, has given us his reaction to this latest developments in the Brexit trade talks and what it is likely to mean for the FTSE, value of the pound, and the financial markets.

Giles comments:  “It’s crunch time. Boris Johnson is making a last-ditch attempt to strike a trade agreement between the EU and the UK. It’s a tricky business – and there’s no telling whether progress will be made. Neither London nor Brussels have been willing to compromise, yet both remain committed to the UK’s final withdrawal date of 31 December 2020. With every day that passes, the chances of a no-deal Brexit rise. Options markets have shown increased volatility over the last few days as traders hedge GBP longs from the summer with put options now.”

“From an investor perspective, it dampens the otherwise positive performance of the FTSE, which recently hit a nine-month high in response to the vaccine rollout in the UK. If a breakthrough is made on Brexit, one would expect a surge in positive gains both in the UK and abroad.

“If a deal is struck then I see the most likely scenario being immediate GBP strength followed by GBP selling on a ‘buy the rumour, sell the fact’ type response. This is because investors have been buying the GBP since the summer on an expected trade deal. If no deal is struck, then the playbook is simple. As long as the EU and UK are still talking, I expect GBP dips to be bought. If either the EU or the UK walk away from a trade deal, then we should expect very heavy GBP selling. However, remember that a weak GBP often helps lift the FTSE as many major UK companies receive their revenues in dollar. A weaker GBP against the USD is effectively a pay rise for some core FTSE100 companies like BP.”

“One thing’s for certain; the last few weeks of 2020 will be a volatile time for markets around the globe. Positive news, such as vaccine developments and the US potentially approving a stimulus package, are being counterbalanced by general market uncertainty. In the UK, this uncertainty is a consequence of Brexit and the long-term economic repercussions of COVID-19.”

Giles Coghlan is Chief Currency Analyst, HYCM

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