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|19 March, 2019

Is the 'no-deal' Brexit risk severely underpriced?

Lukman Otunuga is a research analyst at FXTM. A keen follower of macroeconomic events, with a strong professional and academic background in finance, Lukman is well versed in the various factors affecting the currency and commodity markets. Lukman holds a BSc (hons) degree in Economics from the University of Essex, UK and an MSc in Finance from London School of Business and Finance, where he studied corporate finance, mergers & acquisitions and the role of international financial institutions.

Website: www.forextime.com

Markets appear to be pricing in an extension of Article 50 as a formality

The chronic uncertainty, confusion and drama revolving around Brexit are reaching a boiling point with sterling becoming extremely volatile and wildly unpredictable as the March 29 deadline looms.

In the latest development to the Brexit saga, the Speaker of the House of Commons, John Bercow, essentially blocked Prime Minister Theresa May’s Brexit deal from getting a third vote.

This development has dealt another heavy blow to May’s quest in passing her Brexit deal through Parliament.

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With the clock ticking and the deadline fast approaching, expectations seem to be mounting over an extension of Article 50 to prevent the UK from crashing out the EU with no deal in place.

However, this all depends on what EU leaders have to say about an extension to Brexit. It must be kept in mind that an extension has to be unanimously agreed upon by all 27 member nations before a 'no-deal' Brexit can be safely removed from the equation. What if one of the EU members reject the UK’s request for the deadline extension? This will certainly catch many off-guard and might in turn cause the pound to collapse like a house of cards across the board. While markets are likely to continue pricing a delayed Brexit becoming reality, the prolonged uncertainty and potential variations to the final Brexit outcome leave the pound’s medium-to-longer term outlook open to question.

An unexpected hard Brexit outcome will certainly expose the British economy to severe downside shocks.

While the UAE’s economy may be somewhat insulated from the tremors created by Brexit, some specific industries such as tourism and real estate may be caught in the firing line. With a hard Brexit seen impacting UK economic growth, the UAE’s real estate sector could find itself pressured by a drop in UK investments. A severely depressed pound will also erode the purchasing power of British tourists visiting the UAE.

On the flip side, the UK leaving the European Union could strengthen trade relations between the United Kingdom and nations in the Middle East. There is a potential for healthy economic growth if both sides are able to secure new and favourable trade deals with each other. Alternatively, if the UK ends up staying within the European Union, this will also be a welcome development for the UAE thanks to a significant drop in Brexit uncertainty. All in all, a return of stability in the UK will be good news for Britain, especially when considering how it remains a hotspot for investments from the UAE.

A major question on the mind of many investors remains what will happen on March 29? Will the UK leave the EU with no deal? Will European Leaders grant Theresa May an Article 50 extension? Will Brexit even happen at all? Whatever the outcome of Brexit, it will have a profound impact on the British pound.

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