Brexit has been instrumental in the pound’s trajectory, responsible for its collapse and slow recovery. The coronavirus pandemic comes to add more pressure to the pound due to the lockdown measures and the ensuing adverse economic effects.

In the short term, as the UK grapples with the threat of Brexit and the coronavirus, the outlook looks extremely negative. But, how will the pound fair in the long term?

What’s happening now?

Sterling has been hit by Brexit and the coronavirus crisis, with the latter making its effects on the British currency very clear in mid-March, when the GBP plunged to levels not seen in 35 years with anxious traders turning towards safe havens such as the greenback. Until the pandemic is over, analysts predict that the pound will continue to be weak. At the moment, Sterling will remain reactive to headlines concerning the pandemic which has triggered the deepest decline in economic activity since 1929.

Indeed, things have changed a lot since last December when traders felt optimistic about Boris Johnson’s decisive victory in the general election, with many expecting significant progress in the Brexit talks and positive economic data.

Now, with the transition period due to expire at the end of the year and the government saying that it will not ask for an extension, the reality looks different, with the possibility of leaving without a deal posing a real threat to the pound’s future. This means that the UK could fall into a recession as economists have warned.

Short-term predictions

Georgette Boele, Senior FX Strategist at ABN AMRO has said: "In the near-term we expect another wave of risk-off in financial markets as markets are in our opinion too optimistic currently on the speed and strength of economic recovery." Boele added: “There is an enormous gap between the economic reality and what analysts forecast, on the one hand, and the optimism among investors for the second half of this year, on the other. This should support the U.S. Dollar as most liquid safe haven currency."

Long-term predictions

Following Brexit, the forecast for the pound has been dire.  As Brexit troubles are not over yet, and as the coronavirus continues to inject fear in investors, the long-term outlook for the pound is definitely bearish.

Since the June Brexit referendum, consumers have underpinned Britain’s economic expansion as businesses stopped investing. Despite the fall in the pound, consumer spending has grown since the vote, and with many businesses now closed due to the coronavirus, understandably, there are concerns for an economy so reliant on consumption.

With the economy hurt due to lockdown restrictions and a lack of exit strategy, the pound will be under pressure for the long term.

GBP: Investors turn bearish

In the Financial Times article “Investors turn bearish on the pound,” Philip Georgiadis writes that investors are anticipating further falls for the pound and have “increased their bets against the UK pound to the highest level of the year, raising the spectre of a new bout of volatility for the currency.” According to the article, “fund managers and other companies betting in the futures market have turned bearish as concerns over Brexit rise in parallel with the damage the coronavirus pandemic is causing the UK economy.”

Similarly pessimistic is Rabobank which says: “Additionally, insofar as no real progress was made on the last round of post-Brexit talks between the UK and the EU and given that the summer deadline for any request for an extension to the transition phase is looming, it is difficult to be optimistic on GBP.”

Analysts at Danske Bank also find that in the coming months the pound will remain under pressure as “Time spent fighting the coronavirus by both the UK and the EU means less time to negotiate a deal before the end of the year, increasing the risk of a big trade shock by 1 January 2021.”

While overly optimistic valuations might fall to meet reality and as such drive the pound lower, there is also the possibility of the British currency strengthening as the global outlook improves. Sterling’s weakness due to global uncertainty could be reversed as nations successfully fight the virus and recover.

What is certain, is that there are no certainties and the pound could easily come under pressure as optimism withers.

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British businesses conducting international trade and transferring their funds cross border regularly are increasingly worried about Brexit and the UK’s future relationship with the EU. Boris Johnson has been warned that the current trade talks are failing and that he needs to press the European commission president, Ursula von der Leyen, and EU governments to focus their attention on the negotiations in order to reach an agreement with the British government.

The prime minister has returned to Downing Street on Monday, and he needs to act fast in order to rescue the negotiations before 31 December when the UK will leave the single market and customs union. Both the British government and the EU have agreed that they need to see progress by June, while the UK government has said that there is a possibility to leave the EU without a deal.

The two sides will be meeting again on 30 April. The UK’s chief negotiator David Frost has rejected an extension of the transition period as the government is confident that it can agree on a free-trade deal.

The prospect of no-deal Brexit

However, the prospect of leaving the EU without a deal has become even more real as there are only two rounds of video-conference talks left, while senior figures from both sides agree that delivering a deal is now highly unlikely. An EU official has also noted the added problems of having to communicate online: “You don’t see all the faces of the people around the table; you don’t see the body language, you cannot have discussion in the margins. But having said that, this is how we are working now; we need to make the best of it.”

Last week’s talks have not been progressing successfully either, as there was disagreement between the EU’s chief negotiator, Michel Barnier, and his British counterpart, David Frost. Barnier pointed out that UK officials failed to engage and instead “listened politely” to the EU’s proposals. As he said: “I regret it, and this worries me.” According to the UK, despite their commitments to maintain high standards, the EU rejected proposals regarding the removal of certain trade barriers. Additionally, the UK disagrees with the central role that the European court of justice will play in dispute settlements.

In regards to the issue of Northern Ireland, there are concerns whether the UK will implement the Northern Ireland protocol  in the withdrawal agreement in order to avoid a hard border in Ireland and maintain checks on goods travelling from Britain to Northern Ireland. An EU official said: “You need to have customs checks on goods arriving in Northern Ireland, veterinary controls, a VAT system needs to be put in place.”

UK government not seeking an extension

The UK government has warned EU leaders that they need to change their position if there is going to be a post-Brexit trade deal. The PM believes that there will not be an agreement unless the EU recognises the UK as “an independent state.”

Michael Gove, Cabinet Office minister, has also told MPs that the government will not seek an extension to the transition period, which ends on December 31. He said that extending the period will only force Britain to make a financial contribution to the EU budget which “could be spent on our NHS.” He added that the EU has failed to recognise the UK’s unique status and instead has treated Britain “like the Ukraine,” as if it were a country seeking closer relations with the bloc.

 

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With the coronavirus continuing to affect the UK economy and the issue of securing a Brexit trade deal persisting, the British Pound is forecast to struggle, with investors’ growing increasingly anxious.

While worries about the coronavirus pandemic overshadowed Brexit temporarily, political concerns return as the government has highlighted its reluctance for a Brexit extension.

Brexit: No extension

With the transition period due to end on 31 December and with only three rounds of trade talks remaining, the UK would need to negotiate a trade deal by December 2020, especially when the government says that an extension would only "prolong the delay and uncertainty" around Brexit.

David Frost, the UK's chief negotiator and Michel Barnier, the European Commission's chief negotiator, after their Wednesday meeting via video conference, agreed on three weeks of talks beginning on 20 April, 11 May and 1 June. In a joint statement, they recognised that their work has helped to "identify all major areas of divergence and convergence", but further negotiations were needed "to make real, tangible progress in the negotiations by June."

But the UK government has clarified that no extension would be asked from the EU, despite recent calls by International Monetary Fund Managing Director Kristalina Georgieva to extend the period for negotiations and not "add to uncertainty" as a result of the coronavirus.

However, the prime minister's official spokesman said: “We will not ask to extend the transition period, and if the EU asks we will say 'no.' Extending the transition would simply prolong the negotiations, prolong business uncertainty and delay the moment of control of our borders. It would also keep us bound by EU legislation at a point when we need legislative and economic flexibility to manage the U.K. response to the coronavirus pandemic.”

David Frost has also similarly clarified the government’s intentions: “Extending would simply prolong negotiations, create even more uncertainty, leave us liable to pay more to the EU in future, and keep us bound by evolving EU laws at a time when we need to control our own affairs. In short, it is not in the UK's interest to extend."

The Prime Minister’s confidence in striking a satisfactory trade deal by the end of the year has been criticised by the opposition, with Liberal Democrat Sir Ed Davey saying that the refusal to extend the transition was "deeply irresponsible."

Concerns have also been voiced by the financial world. Economists and strategists have warned about the risks for the pound and have noted that uncertainty typically has driven investors to sell the pound against every other currency. Analyst at Thomson Reuters Richard Pace noted: “GBP dealers should fear July 1, when it will be too late to extend the Brexit transition past Dec. 31, 2020, and GBP would rightly suffer. The UK government has been vehement about not asking for an extension, and the UK parliament won't be able to force one this time, since Prime Minister Boris Johnson's huge Conservative majority will back his decision."

“Tough Times” for UK economy

It is not only the current uncertainty with Brexit, but also the coronavirus’ effects that will deeply hurt the pound and the economy. Chancellor Rishi Sunak has said that the coronavirus will have "serious implications" for the UK economy, as the Office for Budget Responsibility (OBR) is expecting that the virus will shrink the economy by 35% by June. Sunak said that the government needed to be honest and that the OBR’s figures suggest that the UK is facing “tough times, and there will be more to come.”

While the government is "not just going to stand by" and will try to protect “millions of jobs, businesses, self-employed people, charities, and households," the effects of the lockdown cannot be minimised.

Robert Chote, the chairman of the OBR, said that a three-month lockdown followed by another three months of partial restrictions would see the economy declining sharply, a drop that would be the biggest "in living memory."

The International Monetary Fund has also warned that the virus would cause the UK economy to shrink by 6.5% in 2020, and the global economy to contract by 3%.

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After over three and a half years of talking, fighting, delays and fearmongering, Brexit is going to happen on 31st January.

This is a cause for celebration for some, but for others it represents the start of great uncertainty – or worse still – the start of decades of decline for the UK. This may come down to the deal that we agree, or if there is a deal at all.

Which way it goes will still be debated and argued over the years to come, but what will happen after 31st January when Brexit is confirmed?

The Brexit deal

Firstly, let’s take a look at the key points of the deal itself. Currently being examined by the House of Lords, the main issues involve travel, money, health, the rights of citizens and of course, trade. The policies set out in the deal will potentially affect currency which can then further impact such things as property prices.

The main focus of the deal is to leave the EU customs union, meaning that the UK will have the freedom to establish their own trade deals with countries around the world.

A significant sticking point was determining how Northern Ireland would be affected, with Boris Johnson eventually replacing the Irish backstop with a new agreement that will begin in December 2020, after the transition period has ended. In summary, this includes a customs declaration system for goods travelling from Great Britain to Northern Ireland, as well as continued access to the UK market for businesses. Northern Ireland also have the option to vote on their continued membership in this deal four years after the transition period.

Travel

After January 31st, travel plans for UK citizens travelling to EU countries will not be affected.

ABTA, the travel industry’s trade association has said: "If Parliament ratifies the Withdrawal Agreement before 31 January 2020, which it is on track to do, the UK will enter a transition period, meaning everything will remain the same and you can continue to travel as you do now until at least the end of December 2020."

After the transition, a visa similar to the American ESTA will be introduced, expecting to cost around £6 and last for a number of years.

All transport entering the EU, including ferries and cruise ships will not be affected but there may be an additional driving permit if you wish to use your own vehicle within your UK insurance policy in the EU.

Money

Savings are not expected to be affected after Brexit due to all bank trading agreements bought from EU firms being protected by the transition period. There may a short-term gain for savers if interest rates are increased when the Conservative Budget is announced next month.

However, British retirees living abroad may have their pension payments frozen, not benefiting from the EU payment increase, which is based on either inflation, wage increases or 2.5% - whichever is highest. On top of that, those living in the EU and being paid in GBP may lose earnings if the pound falls after Brexit.Property

With house prices showing an increase from November to December last year, estate agents are optimistic that Brexit will finally end the uncertainty that had led to prices stagnating – and falling in some areas - in the UK.

Even with renewed confidence, the February Budget could affect the market, with the potential for reforms for first-time buyers. No-deal is still a slight possibility, so foreign investors will be keeping a close eye on negotiations before parting with their money.

Most estate agents say that surveys have shown that potential buyers generally have overestimated the impact of Brexit so far, and with the political climate much calmer, expect buyers who were holding back to come forward in 2020.

Rental prices are forecasted to rise, due mainly to the lack of rental options on the market.

Currency

The value of the pound can go either way, with a lot of experts claiming the volatility of the past 3 years will calm and the pound will be more stable. Since the start of negotiations, the strength of the pound has been linked to a clean break that protected business, whereas the chaos of a no-deal Brexit has sent the pound down in value. Since the general election result, the pound has rallied due to investors being more comfortable with the prospect of a strong majority Conservative government.

However, with a lot to be done by the end of the transition period – including crucial trade agreements with the EU itself – there could still be choppy waters ahead for GBP. In fact, just this week it was revealed that there are fundamental disagreements between the EU and UK that will almost certainly require more than eight months of negotiations, which formally begin in March.

Trade negotiations

The obvious reason for any difficulties in the negotiations is that the EU believe that the UK should continue to follow some of the EU regulations in order to secure a free-trade agreement. This is mainly due to EU members, including France, asking for a level playing field to be maintained. Trade-offs will likely come into play as the transition period progresses, with a report recently claiming that the UK will allow EU fleets to fish in their waters if bankers and financiers are allowed favourable access to the EU financial markets. The issue with such trade-offs is that invariably they will affect certain demographics unfavourably, which can lead to more stand-offs. With such a tight deadline any significant delays could be disastrous and can bring the no-deal prospect back into the reckoning.

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The pound has dropped to its lowest level since 27 December, after the ONS released its latest GDP estimate for the month of November.

ONS numbers

According to the ONS, the UK GDP grew by 0.1% in the three months to November, while it shrank by 0.3% in November 2019. The contraction in November was worse than expected as uncertainty over the general election and the threat of crashing out of the EU without a deal in October weighed on the economy.

As the ONS figures demonstrate, the services and production sectors grew by 0.1% and 1.1%, respectively in the three months to November 2019, but the production sector fell by 0.6%, its second consecutive rolling three-month decline, while manufacturing output fell by 1.7%.

The ONS stated: “Production fell by 1.2% in the month of November 2019, following growth of 0.4% in October. Within production, manufacturing fell by 1.7%. This was largely driven by large falls in the manufacture of transport equipment, food, and chemicals. These industries were also the main drags on growth in April 2019, just after the UK's original planned date to exit the European Union as shown in Figure 5. This may be indicative of some changes in the timing of activity around the second planned departure in October.”

Today’s figures confirm that the UK economy has slowed for two consecutive months, shrinking in April-June, then showing 0.4% growth in July-September, something which has helped to avoid a recession. It has slowed again to 0.2% in August-October, and 0.1% in September-November.

The Office for National Statistics’ head of GDP, Rob Kent-Smith, said that UK growth was at its lowest level since 2012: “Overall, the economy grew slightly in the latest three months, with growth in construction pulled back by weakening services and another lacklustre performance from manufacturing. The UK economy grew slightly more strongly in September and October than was previously estimated, with later data painting a healthier picture. Long term, the economy continues to slow, with growth in the economy compared with the same time last year at its lowest since the spring of 2012.”

UK economy stagnant

The National Institute of Economic and Social Research (NIESR) noted that the “latest data confirm that UK economic growth had petered out at the end of last year. GDP was virtually flat in the 3m to Nov & latest surveys point to further stagnation in Dec. The short-term economic outlook is for more lacklustre growth.”

More importantly, the idea of the Bank of England having to cut interest rates has resurfaced as investment strategists and traders have mentioned.

Bank of England: Interest rate cut?

The latest GDP data has boosted the chances of UK interest rates being cut soon, possibly at the Bank of England’s meeting at the end of January. Matthew Cady, investment strategist at Brooks Macdonald, said: “UK GDP for November has come in at negative -0.3%. This is quite a bit weaker than had been expected. Consensus had been looking for zero growth month on month. Against this, both September and October were revised up by 0.2% and 0.1% points respectively. The weaker GDP print today puts beyond doubt that the next Bank of England meeting at the end of January is going to be a ‘live’ meeting.”

Peter Dixon, economist at Commerzbank, said that the possibility of an interest rate cut has risen to 50%: “With a growing chorus on the MPC apparently open to the prospect of a rate cut, if the data points in that direction, today’s release might well tip the balance of one or two members ahead of the meeting on 30 January, where the market probability assigned to a 25 bps cut has risen to 50% versus 5% at the start of last week.”

However, it is also wise to be positive and consider the GDP numbers as indicative of a specific time period rather than of a future trend, as business confidence can return after Boris Johnson’s election. As chief economist at PwC, John Hawksworth, clarified, today’s data relates to a specific “period of heightened economic and political uncertainty” and that “our latest survey of the financial services sector with the CBI does suggest some boost to optimism since the election.”

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Prime minister Boris Johnson wants to “get Brexit done,” but with Brexit the unresolved issue of the UK’s future trade relationship with the EU and other countries still remains and is expected to be one of the big concerns at the end of 2020.

If Brexit does happen, the UK will need to negotiate a free trade deal with the EU so it continues to enjoy tariff-free access to its market after the transition period, and will also need to negotiate and sign new trade deals with countries such as the US.

According to Johnson’s withdrawal agreement, the UK will continue trading with the existing terms until the end of the transition period which is due on 31 December 2020. He has already stated that, if he wins a majority, he will negotiate a Free Trade Agreement (FTA) with the EU which will come to replace the current arrangement at the end of 2020. The deadline for next year is considered among economists and politicians a very challenging one, as the time frame is limited and the subject matter demanding and complicated. As it is usually the case, trade negotiations take years, so it is similarly expected that Johnson’s trade agreement will be a difficult task, impossible to deliver as promised. Of course, it will be possible to extend the transition period, but this should be decided by 1 July.

As a Financial Times article notes, it is difficult to see the EU and the UK reaching a deal in as little as five months, especially when there’s legal and translation issues involved. A draft for an EU-Japan deal took four months and 10 days to prepare, “including ‘legal scrubbing’ and translation into 24 official EU languages — and this is viewed in Brussels as an example of the bloc moving at breakneck speed.”

In the case of Canada’s deal with the EU, this took more than five years to complete and another three before it came into force. For some, the UK-EU trade deal will be even more difficult as the two sides will attempt to establish a new relationship that seeks to replace an older one, while for others, the negotiation will be fast and quick as we are already in sync with EU regulations.

What is an FTA?

An FTA is a multinational trade agreement that creates a free-trade area between different states and determines the tariffs and duties on imports and exports in order to eliminate trade barriers, such as trade taxes or tariffs. While a customs union is more encompassing and requires all parties to have the same external tariffs, a free-trade agreement allows countries to establish whatever tariffs they wish, otherwise adopting a preferential treatment system.

If the EU and the UK are unable to reach a trade agreement within the specified time frame, then the UK will revert to World Trade Organization (WTO) terms – which means British exporters would have to face the same tariffs as other countries as the US or China. But even with a trade agreement, the privileges that are currently enjoyed under the customs union will be lost.  A trade agreement will mean more costs and more bureaucratic control for UK companies, which is why economists are warning that Brexit will damage the UK economy.

The UK is also in the process of rolling over the EU’s existing free trade deals with other countries in order to avoid losing tariff-free access to the EU after Brexit. The UK has signed 19 continuity deals with 49 countries. The UK’s biggest trading partners are the US and the UK, with the US being the UK's biggest single trading partner, and the EU accounting for 46% of UK exports. The problem with striking an FTA with the US is the obvious standards in food products, especially when in the US regulations are not as strict as in the EU, with the most obvious examples being genetically modified foods and chlorinated chicken.

At the moment, one of the most important Brexit outcomes is considered to be the resolution of a trade agreement with the EU by the end of next year, as the scenario of leaving without a trade deal will not only result in a political crisis for the government, but also an economic one for the whole of the UK.

Imports and exports

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After a Kantar poll showed that Labour was gaining support, with the Conservatives leading by 43 percent and Labour closing the gap at 32 percent, the pound reacted by falling lower.

FXStreet’s Yohay Elam could not have put it better: “Bearded Corbyn is bringing the bears out." While the chances are low, the possibility of Jeremy Corbyn being the next PM has spooked the pound.

Up until now, the pound has reacted positively in accordance with the possibility of Prime Minister Boris Johnson’s Conservative Party winning at the UK general election. With polls mostly showing that the Conservatives’ lead has been growing, analysts have been anticipating a majority of seats for the Conservatives, which will significantly boost the pound. This is based on the belief that Johnson will “get Brexit done” before the deadline of 31 January, which means that an orderly Brexit will come hand in hand with the pound trading higher.

However, after the Labour party released its manifesto last week promising to increase both spending and taxes, support pensioners and nationalise industries, alongside the pledge of a confirmatory referendum on Brexit, support has surged for the main opposition party, something which is now reflected in the polls.

The Kantar poll

Kantar surveyed 1,097 people online between 21-25 of November. According to the poll, which took place after both parties had published their manifestos, support for the Conservatives fell 2 points while Labour gained 5 points.

The Kantar poll was published on Tuesday following Monday's poll by ICM for Reuters which also showed that the Conservative's lead is threatened by Labour, supporting further the possibility of a hung parliament. A hung parliament will be negative for Sterling as it will create uncertainty over Brexit and hurt businesses and financial markets’ sentiment.

Markets are wary

If Labour continues to perform well in the polls and the gap between the two main opposition parties tightens, then the pound might be unable to maintain its steady upward trajectory. Analysts are cautious now as the risks for the pound are increasing due to markets being too confident that a Conservative majority was the most certain outcome. With the campaign entering its last two weeks and undecided voters (most possibly Labour voters) changing current certainties, risks are definitely on the rise over the coming days.

Investors are wary of the latest Labour bounce, but if Conservatives continue to poll well, then things will change again and the market will become more confident over a Conservative majority scenario.

According to CNBC, Opinium’s latest voter intention poll gives the Conservatives a 19-point advantage over Labour, but “this could be too good to be true,” as BMO Capital Markets Head of European FX Strategy Stephen Gallo said. Gallo also stated that the outlook for GBP was binary. He said: “We’d much rather be looking for value in selling the GBP on a 1-3 month basis, on the view that hung parliament odds are ‘underpriced’ by the FX market, and even with a comfortable (Conservative) majority, the remaining U.K.-EU negotiations on an FTA (free trade agreement) will probably raise the odds of a ‘no deal’ exit from the transition phase in 2020.”

Whether the pound continues to retreat due to polls showing a Conservative lead shrinking, it remains to be seen.

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Historically, financial markets have favoured the Tory party and Conservative neoliberal and free-market economics. On the other hand, investors have disliked hard left policies that seek to protect the rights of the many at the expense of the few, such as nationalizations and wealth redistribution. It is not surprising then that Corbyn’s Labour policies would be seen by many as potentially damaging to the pound.

Here we have a look at the possible outcomes for the pound in case of a Conservative or a Labour majority, as well as some of the pledges each party has made.

Getting Brexit done

For economists, this is clear. If the result of the next general election is a Conservative majority, then the British Pound will rise. This is the most positive outcome for Sterling as it will end political uncertainty, get Brexit done, and eliminate the prospect of a Corbynite government.

In other words, a Conservative majority will enable Johnson’s deal to pass smoothly through parliament and it will help to stabilise the political and economic landscape. Markets understand that a Tory majority means the immediate implementation of Boris Johnson's Brexit deal and Brexit taking place on 31 January 2020.

In this sense, an unfavourable result will be a weak conservative win or a Labour majority. A Labour government will create uncertainty, as it will introduce a new Brexit deal to be negotiated all over again and a referendum to pass the deal, further threatening the pound.

Additionally, many argue that further uncertainty will be created if there is a Labour coalition. According to Peter Kinsella of the Swiss private bank Union Bancaire Privée, “We certainly have not priced in anything like a Labour-type coalition, and if we did, it (the Pound) would certainly be an awful lot lower. We have priced out no-deal but we have not priced in any electoral certainty yet.”

A coalition could be positive for Sterling?

However, others are more optimistic.  JPMorgan sees that a “hung parliament which delivered or held out the prospect of a softer-Brexit coalition of the left-of-centre parties (Labour/Lib Dems/SNP) might actually be GBP positive." Jordan Rochester at Nomura has also said back in May: “GBP would also benefit from Labour’s stance on Brexit being somewhat ‘softer’ than the Conservatives, especially if it forms a coalition with the SNP and Liberal Democrats. A coalition government may encourage some to argue GBP should be lower owing to the uncertainty. But the removal of austerity (leading to higher real yields) and renewed arguments as to a ‘softer’ Brexit are likely to inspire less GBP negativity as once thought.”

Taxes and spending

The Conservatives have pledged to spend more than £250m to invest in broadband, roads, the NHS, schools, roads and police. The Chancellor Sajid Javid has said that the money, which will come from the Housing Infrastructure Fund will help improve roads, schools and transport links. He said: “I have now launched an infrastructure revolution and this step-change in funding will ensure that all parts of the country benefit as we level-up opportunities. This £250m will increase the number of houses available to buy and help support people to achieve their dream of home ownership.” Shadow Chancellor John McDonnell criticised Javid's "pathetic publicity stunt announcement" and said: "When there are millions of people on our housing waiting lists and families with children living in containers, we need real change and real investment in our infrastructure, not this derisory drop in the ocean."

In terms of personal taxes, Conservatives will increase the threshold for the 40p rate of income tax from £50,000 to £80,000 and raise the starting point for national insurance (NI), which will be worth £460 per worker. The income tax will cost £8bn a year and help 2.5 million of the highest-earning employees.

Labour has not made any specific promises yet but according to its 2017 manifesto, it will increase income tax rates to 45 percent for salaries over £80,000 and to 50 percent for salaries over £123,000. They will spend £250bn on upgrading transport, energy and broadband infrastructure.

This is why, the latest newspaper headlines highlight fears of a Labour government and how wealthy individuals are transferring their money abroad before the general election, since as they stated, “If Corbyn gets in, we're sending our money to Switzerland.” Another recent article, “Super-rich prepare to leave UK 'within minutes' if Labour wins election,” shows how the UK’s richest families are preparing to shift their fortunes and make early gifts to their children in order to avoid Corbyn’s threat to tax inheritances above £125,000. Lawyers and advisers for these millionaire and billionaire clients have said that for these rich individuals, a Corbyn-led government is a bigger threat to their wealth than a hard Brexit.

Health and social care

Conservatives will spend £13bn under a “Health Infrastructure Plan” to build 40 new hospitals in England, but only £2.8bn and six hospitals will go ahead at first. Labour will increase spending which will be paid by the income tax rises on the highest 5 percent of earners and will increase tax on private medical insurance. It will create a new National Care Service for social care for those over-65s (cost £6bn), scrap prescription charges (cost £750m) and develop a state drug company to develop cheaper drugs. It will also increase GP trainee numbers in England by 50 per cent. While more is expected from Labour’s latest manifesto, the 2017 election pledge referred to £30bn in extra funding.

Brexit and NHS: “everything is on the table”

Brexit has complicated the issues of the NHS, with fears of medicine shortages in a no-deal Brexit scenario. It has also opened the possibility of negotiating new trade deals with such countries as the US. Back in June, during a press conference with the then Prime Minister Theresa May, President Trump claimed that “everything is on the table” when it comes to striking a deal with the UK, including the NHS. He said: “So NHS or anything else. A lot more than that.” Whether he meant it or not, this has now created fears that the UK would be paying more for medicines under a US trade deal and passing on costs to both patients and the NHS.

Following the comments of drug pricing expert Dr Andrew Hill on Dispatches that the US spends more per capita than the UK on medicines, something that would equate to an extra £500 million a week in the UK, Labour has used the £500 million figure in an attempt to also criticise Brexiters’ early claims of funding the NHS with £350 million a week.

It is within this context that Jeremy Corbyn accused Boris Johnson of wanting to “hijack Brexit to unleash Thatcherism on steroids.” He added: “Johnson and the Leave campaign promised to rebuild our NHS. Johnson stood in front of a bus and promised £350 million a week for the NHS. Now we find out that £500 million a week could be taken out of the NHS and handed to big drugs companies under his plans for a sell-out trade deal with Donald Trump.”

Of course, this has been denied by the Conservatives who said that it was “shameful” that Labour was spreading “lies about the NHS.”

Boris Johnson already clarified at a press conference with Trump that the NHS “is not for sale.” His health secretary Matt Hancock and trade secretary Liz Truss also said that “The price the NHS pays for drugs won’t be on the table. And the services the NHS delivers won’t be on the table.”

With no concrete evidence, Labour is using political rhetoric to set itself as the party that is committed to protecting the NHS from any such threat. For many commentators, speculation will continue as Johnson will delay the Conservative manifesto launch until just two weeks before the general election. Labour’s manifesto will be out next week after officials decide this Saturday on which policies to include.

As the election campaign heats up, and as the parties publicise their manifestos, the pound will continue to be impacted by political developments. For investors, the only thing certain at the moment, is that a Conservative government appears to be the best possible deal for the future of the pound.

 

Boris Johnson doesn’t like to give up easily, so his latest promise is that the UK will complete a free trade agreement with the EU by 31 December next year. As he has stated, if he wins the election in December, the UK will be able to strike a free-trade agreement within just 12 months.

Is this possible?

According to the Financial Times, “few trade experts believe this is possible.” The reason being is the difficulty of having an agreement ready in such a short time, especially considering Brexit happening in January, and a transition period lasting until 31 December 2020. If this is the case, the article argues, the UK and EU would need to have agreed on “a comprehensive trade agreement by the end of next year. If they haven't, the UK in effect falls out of the EU with no deal. Most trade experts say a free trade agreement can’t be concluded that quickly.”

For many Brexiters, the UK wants to complete a similar kind of agreement as the Canada plus one, which took seven years for the EU to conclude and which will need the approval of all 27 remaining EU states.

Managing director of Eurasia Group Mujtaba Rahman has confirmed the impossibility of agreeing any trade agreement between the UK and EU. Talking to the FT, he said: “Remember this will be a trade agreement unlike any before. Normally trade agreements are designed to promote economic convergence. This one will be about managing divergence. That’s much more complicated.” 

As the government is not open to extending the transition period beyond the start of 2021, Johnson will have to win the election with a majority, something that will again open the possibility of a no-deal Brexit.

A Canada style free-trade deal

Boris is not looking for a close economic partnership, but rather for a trade agreement similar to the so-called Canada plus agreement, that will define the UK’s future relationship with the EU. Canada’s trade agreement with the EU is considered one of the most ambitious ones and is officially called the Comprehensive Economic and Trade Agreement (CETA). IT was signed in 2016 and was enforced in September. However, it hasn’t been ratified yet by all the countries, a step that could take several years.

The specific Canada trade deal has helped increase exports to Canada with Canada’s Minister of International Trade Diversification Jim Carr stating that: "At the Port of Montreal alone, we have seen 20% more traffic in goods headed across the Atlantic. This enormous step in growth for Canada and the EU has been the reason why new shipping lanes have been added to accommodate container traffic."

According to the deal, 98% of all tariffs on goods traded between Canada and the EU are duty free, something however, that, does not mean no border controls. Additionally, when it comes to the financial services, CETA does not offer anything that is not already covered by World Trade Organization rules. There is no"passporting" rights that will allow Canadian financial companies to sell their services in EU member states. Finally, there will still be tariffs on some products and quotas on certain agricultural products.

Not Ideal for UK and EU exporters

A Canada plus-type agreement might enable the UK to leave the EU customs union and decide on its own tariff rates, but it won’t necessarily solve all the issues faced by UK and EU exporters. There will be costs and additional bureaucratic documentation that will be too complicated or costly for companies.

EU: Any future trade agreement will be “difficult”

The European Union's Brexit negotiator Michel Barnier talking on Tuesday at the Web Summit, in Lisbon, said that negotiations on a future trading relationship with Britain would be "difficult and demanding," as the EU "will not tolerate unfair competitive advantage." "The UK should not think that zero tariffs, zero quotas will be enough," and that time would be "extremely short" for negotiations. He added that the UK still faced the threat of a no-deal Brexit: “Even when the [Brexit] deal is ratified it will not be the end of the story ... We have to build a new partnership with the UK after they withdraw."

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The British pound fell after parliament rejected the government’s programme motion to accelerate the timetable for the withdrawal bill, with 308 votes in favour and 322 against. The defeat means that the government will now be unable to leave the EU before the end of October. The potentially good news for the pound and politics more generally, is the likely elimination of a no-deal scenario, as the EU has shown its willingness to offer an extension to Britain’s 31 October deadline for leaving the bloc.

Jeremy Stretch, head of G-10 currency strategy at Canadian Imperial Bank of Commerce, said in a Reuters report that, “For now it seems the market is still generally expecting this is a setback, but not a fatal setback, to a negotiated Brexit. There hasn’t been a rapid uptick in no-deal pricing at this point.”   

Junichi Ishikawa, senior foreign exchange strategist at IG Securities in Tokyo, added that, “The pound will adjust in a narrow range for the time being. For now, the risk of a no-deal Brexit has receded, but there are still political uncertainties.”

The EU wants to avoid a detrimental no-deal Brexit, as a former Tory Europe minister, also confirmed on the BBC’s Today programme. He said that the EU would not want to be blamed for a no-deal Brexit, so they will offer an extension. As many MPs noted, he said that the withdrawal agreement bill was bigger than many anticipated, and that the government should offer more time in order to get it through parliament. He said: “I see no way that the October 31st deadline can be met anyway now the bill has been paused in the commons. I think the fear in Downing street is partly of rafts of amendments to the bill, but also about the difficulty of governing without a majority ... There are broader questions that underly the disputes about the timings of the Brexit bill.” For him, an election at the end of November or early December was possible but the public won’t be very open to an election just before Christmas.

What happened on Tuesday?

While the withdrawal bill was passed by MPs on its second reading, by 329 votes to 299, 20 minutes later, the government’s programme motion was defeated. The news of passing the Brexit deal was welcomed by the government as Johnson praised MPs for having “embraced a deal.”

But the defeat on the programme motion by 14 votes is a significant blow to the government and could derail the process. 

What is a programme motion?

A programme motion is put forward after a government bill has passed its second reading and can be used by the government to set the timetable for debating it as it progresses through the House of Commons. The defeated programme motion on 22th of October argued for a very specific and limited timetable which allowed three Commons days for the entire process– giving enough time so the UK could leave on 31October. The argument goes that the proposed timetable was narrow and didn’t leave enough time for debate.  

What happens now?

On Saturday, Johnson wrote to the EU to formally request a delay to Brexit until 31 January. After the defeat on Tuesday, he noted that would “pause this legislation” and await from the EU to grant a possible extension. While during Tuesday’s debate Johnson promised to pull the bill and seek an election if there was an extension, he left the possibility of a short delay open. As he said afterwards, “One way or another, we will leave the EU with this deal.” 

A general election is, however, likely, especially if the EU proposes a lengthy delay. With a no-deal Brexit no longer in the cards, it is expected that Labour will support a general election.

Many believe, that despite his declarations against a lengthy delay, Johnson aspires to be the prime minister known for delivering Brexit, so he might attempt to push the bill through parliament before an election.

Paul Dales, Chief UK Economist with Capital Economics, said that a short delay is now possible and would not hurt the pound: "A delay to Brexit now appears the most likely scenario and the chances of a near-term deal have diminished a bit. A short delay to finalise a deal would not be a blow to economic growth and the pound, especially if it were followed by a deal that would eventually prompt both to rise. In that case, we suspect the Pound would climb pretty quickly."

On a lighter note, Guy Verhofstadt tweeted that on the event of an extension, he would be submitted to “another three weeks listening to Farage,” whose Eurosceptic rhetoric is not sonorous to European ears.

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