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CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Please ensure you fully understand the risks involved. CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Please ensure you fully understand the risks involved.

Brexit update: A constitutional crisis in the making?

The latest developments in Brexit raise the odds of a no-deal Brexit come October 31.

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What are the latest Brexit developments?

UK politics has been thrusted toward potential chaos, after the Queen approved UK Prime Minister Boris Johnson’s request to suspend Parliament from as early as September 9, to October 14. Critics of the move have accused the Prime Minister of attempting to stifle Brexit debate – and a potential set of circumstances by which a no-confidence motion could be table in Parliament to bring about an early General Election. Prime Minister Johnson denies the accusations, but there is little doubt that a suspension of Parliament for this long would limit the opportunity MPs have to debate Brexit, and subsequently raise the risk of a “Hard Brexit” come October 31.

Why do they matter for financial markets?

The consensus opinion in the financial markets right now is that a “hard” or “no-deal” Brexit would wreak havoc on the UK economy. Whether that point be right or wrong, market participants are behaving in such a fashion that suggests that would prove true. And the reasoning for this is hardly irrational: the last quarter’s GDP print from the UK showed a contraction in growth. Only another successive quarter of negative growth in the UK economy would be required to bring about a technical recession. Given the short-term shock a “hard” Brexit would bring to UK economic activity, the risk of recession ought to be considered, at the very least, uncomfortably high.

How is it impacting the Pound Sterling?

The higher chance of a technical recession in the UK economy is leading to greater bets in financial markets that the Bank of England will have to cut interest rates soon. As it currently stands, the interest rate futures curve is suggesting that a rate cut will come from the Bank of England by the end of the year. The Pound Sterling has sold-off on this basis, pushing back towards the 1.21 level. Given the long-term trend lower in the Pound, recent developments simply risks accelerating this existing downtrend. The recent multi-year low at 1.2015 comes in sight now, with a break below 1.20 possibly on the cards in the near future.

This information has been prepared by IG, a trading name of IG Australia Pty Ltd. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.

Trading around Brexit

Find out how the UK’s exit from the EU continues to affect traders, and discover:

  • The unique opportunities in a ‘hard’ and ‘soft’ Brexit
  • The markets you should be watching
  • Everything that’s happened so far

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