Pound loses post-election gains as PM bids to block Brexit extension
pound gave up all of its post-election gains yesterday as Prime Minister Boris Johnson moved to prohibit Brexit talks extending beyond the end of next year, renewing fears of a hard exit from the EU.
The move came after Mr Johnson won a larger than expected parliamentary majority in last week’s election.
His move to add a clause to the Brexit Bill ruling out an extension to the transition came as a surprise to financial markets.
Many analysts had believed Mr Johnson would pursue a more pragmatic approach to talks with the EU.
Petr Krpata, foreign exchange strategist at investment bank ING, said: “Leaving without a trade deal at the end of next year is much the same as a hard Brexit and that’s clearly negative for sterling.”
Against the euro, the pound hit a low of 84.71p before recovering modestly to 84.513p after it had been as strong as 83.558p earlier in the day.
Sterling staged its largest decline since July against the dolTHE lar and at one stage was as much as 1.3% lower before settling 1% weaker for the day at $1.3198.
Mr Krpata said the decline in the value of the pound, which had rallied strongly on the Conservative election win, marked the end of any election-related “hope premium”.
He added that the euro/pound rate was “unlikely to test the 83p level again in the coming months”.
The planned legislation in the withdrawal agreement runs the risk that 2020 will end without a deal, in a move that could see the UK exit the EU on World Trade
Organisation terms. Those terms would see huge tariffs on exports of agriculture and food goods from the Republic of Ireland to the UK.
In its assessment of prospects for the Republic, the Central Bank of Ireland said that a no-deal exit on October 31, the planned withdrawal date, would pushed the economy into recession in 2020, compared with the prospect of 4.3% growth if the trading relationship with the UK remained unchanged.
Gloom over the pound dripped into UK stock markets. The FTSE 250 index dropped by 1.7%, even as the FTSE 100 index held steady.
The FTSE 250 has a greater concentration of small, UK-focused companies, including Belfast-based IT business Kainos, while the FTSE 100 has a raft of international companies.
Most trade professionals caution that it will be impossible to strike a trade deal between the UK and EU in a year.
London is said to want a deal that mirrors the one struck between Canada and the EU, although that took seven years to nail down and does not cover the services sector.