uk-brexit-eu-market-outlook

UK – Brexit: getting unpleasant matters over and done with

The UK political stage is strongly dependent on any further developments arising from the Brexit negotiations and their outcome.

UK PM Theresa May had clearly stated that her government would be delivering Brexit at the 29th of March and the UK would leave the EU on that date.

Given the recent developments in the UK parliament, the date was indirectly confirmed once again as the UK parliament, decided to reject any extension of the Brexit date.

Heating up negotiation providing volatility for the GBP

On the flip side though, it ordered the UK government to go back to Brussels, scrap the Irish backstop and replace it with alternate means and also showed its preference for an agreed Brexit.

The EU, on the other hand, seems to be digging and refusing to reopen negotiations on the agreement.

So, negotiations may prove to be hard, providing volatility for the GBP.

Should Theresa May return with poor results to the UK parliament, we could see some reopening, with potentially destabilizing effects on the UK political scene.

What could happen to UK Economy?

Economically the UK braces for the possibility of a hard Brexit.

Should the country crash out of the EU without a deal, the economy could suffer, as the BoE had warned that a disorderly Brexit could cause a possible recession.

In such a scenario, a potential rate hike probably will be off the table as an option for the BOE, despite analysts stating that the next rate hike would occur after Brexit.

On the other hand, should the UK be able to achieve such concessions from the EU that would satisfy the UK parliament, or have an agreed Brexit under any circumstances, we could see the UK economy picking up again.

Such a scenario could bring the possibility of a potential rate hike by the BoE, back on the table.

Eurozone – Political risks and ECB policy to dominate the euro

On the other side of the Atlantic, the Euro area could have a bumpy 2019.

The political scene seems to be uncertain, as, in May, elections for the European Parliament will take place.

Populists are expected to strengthen as a political power and could mount pressure for some easing in Eurozone fiscal rules.

Yellow Vest movement in France

Also, the political unrest in France with the “yellow vest” movement could spark further uncertainty which under certain circumstances could spread in other countries, as well.

It should be noted that the French president Macron’s effort to compromise with the protesters, could end up strengthening tendencies within the Eurozone for an easing of fiscal rules.

Immigration Issues in Germany

In addition, the German political scene seems to be stable at the moment; however, the recent demonstrations in Germany about immigration issues have been indicating the contrary.

Especially, should the AfD strengthen during the European Parliament elections and the SPD and/or the CSU weaken, we could see some frictions between the three partners of the German government.

How will Brexit impact Eurozone Economy?

On the economic front, it becomes more evident every day that Eurozone’s growth rate slows down.

A possible hard Brexit could also contribute to further deceleration, as a potential political uncertainty in the Eurozone.

We expect Eurozone’s and Germany’s lukewarm results to continue to torment the common currency for the first two quarters of 2019.

Should there be a gradual picking up of the area’s economic data, we could see the ECB restarting its efforts for monetary tightening, with a possible rate hike near the end of the year if at all.

On the other hand, should we see the picture of Eurozone’s economy worsening, we could see the ECB abandoning any former plans for a rate hike “past summer 2019” and considering measures of easing their monetary policy.

The decision on the monetary tightening policy is expected to rely heavily on the consensus of ECB member’s, but never the less also the appointment of the successor of Mario Draghi at the head of the bank, could prove to be a clear indication of the Unions intentions and could influence the bank’s intentions substantially.

Also, at another level, Juncker’s replacement at the head of the EU council could consist of another political risk for the Eurozone, however currently seen as of lesser impact for the common currency.

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