Brexit update: A constitutional crisis in the making?

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.