Johnson Claims another Victory as Britain Inches Closer to the Brexit Door

The Debate

It was back to work for members of parliament from the get-go this week. It was 3 days of debate on Boris Johnson’s Withdrawal Bill.

The outcome was in stark contrast to those that Johnson’s predecessor had become accustomed to before her ousting.

Even Boris Johnson had suffered a series of defeats before his renegotiated Bill got support ahead of the General Election.

So, members of parliament have finally aligned themselves with the people, who had certainly spoken in December.

Thursday’s vote was key, as it was ultimately last chance saloon for MPs to reject the Bill before it makes its way to the House of Lords.

It was another resounding victory, with 330 votes in favor and 231 against the amended Withdrawal Bill.

The outcome of the vote means that Britain will leave the EU on 31^st January to then enter a transition period that ends on 31^st December.

The Transition Period

As part of the withdrawal agreement, Britain is required to enter the transition period upon its official departure from the EU.

The transition period runs until 31^st December 2020, a data that can no longer be extended…

While no longer a member of the EU, Britain will continue to fall under EU rules until the end of this year. That includes contributions to the EU budget…

The purpose of the transition period is to allow the EU and Britain to focus on the finer details of Brexit. This includes the much talked about trade agreement that will need to be hammered out.

From a British standpoint and for the Pound and UK economy, the best possible outcome is a free trade deal. That would give Britain the same trade terms with the EU that currently exist, pre-Brexit.

From the EU’s perspective, giving Britain such a favorable deal, without significant concessions could be damaging.

There are a number of member states that have eyed a departure from the EU. Britain’s terms could ultimately become a blueprint for future departees…

And in there lies the problem that will likely deliver a rocky 11 months ahead for the Pound.

What’s next?

With the Bill now on its way to the House of Lords, the focus will shift to how the British government progress on negotiating trade terms with the EU.

Over the holidays, newly appointed EU Commission President Ursula von der Leyen had raised concerns over the time available to negotiate a trade agreement.

Visiting the British PM on Wednesday, she reiterated the same view, while also adding that trade negotiations would be far more challenging than the withdrawal negotiations.

Once a member of the Establishment, always a member of the Establishment. The EU’s stance on any member departing remains unchanged and they will undoubtedly make it as challenging as ever.

Few had expected the EU to wave Britain off into the sunset and, where Theresa May failed, Boris Johnson has succeeded thus far.

Restricting the transition period to the 11-months will likely become a key consideration for both sides.

With the EU due to submit its demands by 1^st February, there are just 10-months to wrap up a trade agreement.

Bilateral Trade Agreements

As both sides prepare to return to the negotiating table, Britain will also begin bilateral trade negotiations with other countries.

Previously, Britain’s trade terms with countries such as the U.S, Japan, and China fell under the EU’s terms.

Those in favor of Brexit, including the British PM, have long argued that the UK economy would materially benefit from having its own bilateral trade agreements.

While there are other areas that both sides will also need to negotiate, trade negotiations will be the market’s main area of focus.

Progress or lack of will ultimately dictate whether there is a hard or soft Brexit.

A hard Brexit would leave Britain and the EU to trade under WTO trade terms, which would suit neither side. While the EU also relies on Britain on trade, Britain may ultimately be worse off. That is assuming of course that the balance of trade remains the same.

The freedom to trade bilaterally with countries outside of the EU could ultimately lead to a material shift in Britain’s trading relationships… It could even lead to the likes of the U.S becoming Britain’s largest trading partner…

Food for thought for the EU and the Establishment.

For the Pound

The uncertainty and the Brexit chatter will continue for another 11-months. In stark contrast to the last 3-years, however, is that this uncertainty is now over the terms under which Britain leaves. The reality is that hard or soft Brexit has always been a major concern.

Negative chatter from the EU is to be expected in the months ahead. After the last few years, the Pound may even be more resilient to the EU’s ways…

Ultimately, it will boil down to how the government progresses with the EU and other countries in forming trade agreements.

Government transparency on progress with the EU, in particular, will be important. The Pound, business investment and ultimately the economy will depend on it.

At the time of writing, the Pound was down by 0.02% to $1.30636. A return to $1.40 levels will be economic data dependent for now. Near-term, a pickup in economic activity is key. Any material upside, however, could well be offset by a lack of progress on trade.