The proposed agreement provides for a permanent customs arrangement for Northern Ireland, the UK and EU after the transition period: The deal revolves around a complicated set of rules that will govern customs arrangements, including a partial customs border in the Irish sea. This is a major concession from Boris, one that Theresa May steered clear of. Northern Ireland will legally be in the UK’s customs territory, but apply EU rules for tariffs, avoiding the need for a border on the island of Ireland. There are exemptions from tariffs altogether and therefore customs checks in the Irish sea for low risk goods that are unlikely to head to EU markets.
The consent mechanism is complex, and provides for a vote in the Northern Ireland assembly on the arrangements 4 years after the end of the transition period. Following this the NI assembly can vote to remain in the arrangements by a simple majority as opposed to the dual majority among both nationalist and unionist members that Stormont initially insisted on. If the Northern Irish assembly is not sitting, the arrangements remain in place by default. The effect is to reduce the DUP’s ability to unilaterally leave the arrangement.
These consent arrangements represent a major concession for the DUP, should they choose to vote for it on Saturday.
Parliamentary arithmetic remains daunting and a general election is still probable.
Boris Johnson’s Government is well away from a working majority in the House of Commons.
The critical question for the deal between here and Saturday is if the DUP will support it. So far this seems unlikely given the concessions on the consent mechanism. Bloomberg reports that DUP lawmakers have said they won’t be supporting it and official DUP sources said yesterday that their position remained unchanged. But a breakthrough by Saturday can’t be ruled out.
Labour leader Jeremy Corbyn has already confirmed his opposition to the deal, and the number of Labour rebels is likely to be small. A general election is therefore a very likely outcome after Saturday, as the Benn Act forces Boris Johnson to send a letter asking for an extension to the October 31st deadline if a deal is not passed. Boris may attempt to defy the legislative intent of the Benn act, putting the UK in a constitutional crisis and raising uncertainty significantly.
On balance, the fact Boris has a deal is good for Sterling.
The fact that Boris has decided to strike this deal despite the significant concessions it requires from the DUP suggests that he would prefer to run a general election campaign on a platform of having struck a deal with the EU. This is why sterling has rallied significantly the deal significantly reduces the chances of a no-deal outcome. These are now the key scenarios for sterling:
A deal is passed on Saturday, sending GBPUSD well above the 1.30 area. This is far from assured or even likely, given the concessions required from the DUP and their opposition so far.
Boris complies with the Benn Act and an extension is granted leading to a general election. The Conservative Party runs on a platform of Boris’s deal. Again, sterling upside but less than an outright deal.
Boris complies with the Benn Act, and heads to an election on a platform of no-deal. This is a realistic possibility if the deal fails on Saturday, given the electoral threat posed by the Brexit Party should the Conservatives run on a platform seeking a deal. Given the strong position the Conservative Party has in the opinion polls, this could reignite no-deal fears and lead to sterling downside.
Boris defies the Benn Act, putting the UK in a constitutional crisis. Significant sterling downside.
EU leaders will review the legal text this afternoon given the substantial concessions that the agreement makes on behalf of the DUP, EU assent is likely to be granted and the whole process will head to a dramatic showdown in Westminster on Saturday.
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