Planning for a no-deal Brexit is still the wisest course of action

Planning for a no-deal Brexit is still the wisest course of action

Sterling regained more ground last week as UK politicians moved to close off the prospect of a no-deal Brexit at the end of October.

They passed legislation that would require the country's prime minister - Boris Johnson - to seek a further extension to Article 50 if a deal on Brexit has not been put in place by October 19.

This was seen as greatly reducing the risk of a no-deal exit at the end of next month.

Notably, the euro dropped back under 90p against the UK currency, a level it has clung onto at the start of this week, having reached as high as 93p in August.

A no-deal Brexit could still occur at the end of October if the British prime minister was to win an early snap general election.

However, the UK parliament has not acquiesced to his desire to have an election by mid-October, with November now seen as the more likely time.

The market had become very short the UK currency over the summer. The closing out of some of these positions by traders, in the light of the receding risk of a no-deal Brexit at the end of October, has seen sterling rally in the past fortnight.

However, downside risks remain for the currency. A UK election is still on the cards, if not in October, then in November.

And, it is hard to see an outcome to the election that would be positive for sterling.

A win for the Conservative Party would greatly increase the prospect of a no-deal, hard Brexit in the following months.

A win for the Labour Party would take a no-deal Brexit off the table, but see markets fret about the high spend, high tax, government interventionist policies of the new administration.

A hung Parliament would mean continuing uncertainty and leave a no-deal Brexit on the table as the default position if the UK can’t come to a decision on the matter.

The outcome of the UK election would be very hard to predict. Opinion polls are pointing to a win for the Conservatives, but without an outright majority - and they have been unreliable in recent elections.

The mood of the electorate could also change, as during the 2017 election.

Any campaign is going to be fought around Brexit and may become a re-run of the 2016 referendum. Thus, there may be a lot of tactical voting in many constituencies.

Traditional political allegiances are also changing in the UK.

Planning for a no-deal Brexit is still the wisest course of action

The performance of the Brexit Party will be important, as a very strong showing would damage the prospects of the Conservatives winning the election.

Meanwhile, even if the Liberal Democrats were to poll well, they may not win many seats under the first-past-the-post electoral system.

In the 1983 election, they captured 25.4% of the vote but won only 23 seats, or 3.5% of the 650 seat total.

Overall, one can expect continuing uncertainty in the next couple of months as we wait to see whether a general election can break the impasse in the UK over Brexit.

A no-deal Brexit remains a distinct possibility and could follow soon after any general election. Sterling can be expected to fall sharply in such circumstances.

It is important to understand that the UK can leave the EU at any stage during an extension to the Article 50 period.

Thus, firms would be well advised to continue with their preparations for a no-deal Brexit.

The risk now is that it could occur with little warning and in a disorderly fashion.

Oliver Mangan is chief economist at AIB

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