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Boris Johnson, the EU and the Backstop

Bob Mason

Its day 3 of Boris Johnson’s Prime Ministership and, while he’s busy reshuffling his cabinet, he’s also beginning to get a sense of what lies ahead between now and Halloween.

Johnson looked to set the tone for his early days as British Prime Minister, talking of the need to remove the Irish border backstop that was career-ending for Theresa May and a number of other members of the Tory Party.

Unsurprisingly, the EU responded with haste, reaffirming the EU’s stance on the Irish backstop and going so far as to say that the British Prime Minister’s speech was combative.

While the EU appears to be set to continue on the path that led to a 2nd extension of Brexit to 31st October, the EU also left the door open to further discussion on Thursday.

The Geopolitical Landscape

The EU’s swift response to Boris Johnson’s first address to Parliament as British Prime Minister will be a taste of what’s to come.

It’s not the first time that the EU has faced the prospects of Britain leaving without a deal. While Johnson will look to use the very threat of a no-deal to incentivize the EU to return to the negotiating table, the EU is also well aware of how challenging it would be for Johnson to pull Britain out of the EU without a deal.

Parliament continues to dig its heels in and as of today, Johnson would need to suspend Parliament to deliver Brexit by 31st October should any amendments to Theresa May’s deal continue to be unacceptable to lawmakers.

Johnson’s future hangs in the balance even after just 3 days in number 10.

Failure to deliver an alternative deal for the UK Parliament to vote on would be a tremendous failing. Theresa May’s deal failed to be voted in on 3 separate occasions. There would be little point in Johnson reintroducing the very same deal for Parliament to vote on. 4th time lucky would be a step too far.

For the summer, Johnson will be eager to get talks going with the EU. He has until 3rd September to attempt to change the structure of the current deal.

Will the EU actually change stance or agree to materially alter the existing deal? Highly unlikely would be the more optimistic view on what lies ahead.

Johnson’s assurances that EU citizens living in Britain can to continue to live in Britain was good news. Perhaps the British Prime Minister would have been better off keeping the assurance for the negotiating table, however. Time will tell.

The Pound

At the time of writing, the Pound was down by 0.13% to $1.24316.

We continue to expect the Pound to be under pressure. Sensitivity to any Brexit talk and BoE forward guidance remain negatives near-term.

For any meaningful rebound, the EU’s stance would need to materially change. Only then can the markets really begin to shift on expectations of BoE monetary policy easing later in the year.

For now, the stats have been far better than had been anticipated. Regardless, there is a strong expectation that its downhill from here.

Talks of Britain entering a recession are already doing their rounds. If the numbers begin to affirm negative sentiment, Johnson and the Pound will come under increasing pressure.

This article was originally posted on FX Empire