After EU’s approval of the request to extend Article 50 for another three months (January 31, 2020), the UK parliament passed a bill calling for early elections on December 12. The market remained cautious about these moves with both sterling and euro moving in narrow ranges. The best outcome for sterling is a Tory majority. This scenario signals a higher chance that the government withdrawal deal can be passed in the parliament. While opinion polls support this case, the actual election outcome can be surprising. Passage of the deal will lead to the second phase of negotiation, EU-UK trade relations. This is the most critical stage of Brexit negotiation. We expect sterling to remain volatile.

Prime Minister Boris Johnson’s fourth motion for early elections was passed with 438-20 vote. The bill revealed a divided Labor party. While its leader Jeremy Corbyn noted that the party would support an election as a “once-in-a-generation chance to transform our country”, about half of its MPs were absent or voted against the motion. LibDems and SNP abstained as their motion for elections on December 9 was rejected.

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With 5 weeks to go for the elections, opinion polls show that Conservatives have 13% lead over Labors. According to polling analysts, Conservatives will likely win majority with its 37% support in opinion polls. If Conservatives can form a majority government, it will highly increase the likelihood of passing the government withdrawal deal. This would be the best scenario for the market as uncertainty is reduced and Brexit will take effect on January 31.

However, the question is whether these supports translate to votes in December. Moreover, it is also uncertain if Conservatives could maintain these supports in coming weeks. Labor’s doubling of supports ahead of 2017 elections was surprising. That said, the chance of a Labor majority government is low. A Labor-led government would be a minority government with support from other opposition parties. Since both Labors and SNP favor second referendum, while LibDems opt for withdrawal of Article 50, coalition government of these parties would increase the chance of Bremain. This might be a second best scenario for the market.

After all, the developments suggest that the chance of no-deal Brexit has further diminished. Passage of the deal will lead to the second phase of negotiation, EU-UK trade relations. This is the most critical stage of Brexit negotiation. We expect sterling to remain volatile.

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