Pound hit as Johnson’s new Cabinet ramp up hardline Brexit rhetoric
The Pound has pushed lower at the start of this week as Boris Johnson’s new cabinet ministers have ramped up their hardline Brexit rhetoric. This has increased investors’ concerns that the UK are heading for a disorderly exit from the EU without any transition period.
Over the weekend, Michael Gove, who’s responsible for no-deal planning, said that the government are now “working on the assumption” of a no-deal Brexit and that it “is now a very real prospect”. Whilst they would prefer to reach a deal with the EU, he said that they wouldn’t accept small tweaks to Theresa May’s withdrawal agreement, which was rejected three times by parliament. Dominic Raab (the new foreign secretary) has said this morning that “the undemocratic backstop must go” and he re-iterated that they are turbo-charging no-deal preparations. Accordingly, Sajid Javid (the new chancellor) is expected to announce extra funding of more than £1 billion for no-deal planning.
Since Boris took power last week, the EU have continued to remain firm and stated that the withdrawal agreement is not up for renegotiation and that removing the backstop is not possible. The backstop is their way of protecting the Single Market which is one of their key objectives. Without any more concrete solutions on the Irish border issue, then it is hard to see them removing this from the deal. That said, Johnson’s team will be playing hardball to try and get some further concessions around this. Clearly, the UK and EU are (re-)drawing their battle lines, however, the same fundamental issues remain.
Johnson seems adamant to deliver on the 31st October deadline regardless of the negotiations. Obviously, this presents a significant risk to pound and is why traders have continued to sell Sterling off. UK lawmakers, however, will continue to try and find ways to prevent him forcing a no deal Brexit through. Although, even if Parliament can prevent a no deal Brexit, it then opens us up to a general election and therefore more prolonged political uncertainty.
The latest odds of a no-deal Brexit have been moving higher with some banks forecasting odds as high at 50%. Forecasts vary a lot between analysts with some feeling that a general election is more likely than a no deal Brexit on the 31st Oct. As a result, the Pound has hit the weakest levels against the USD since March 2017, having lost over 1% this weekend. The GBP/EUR has slipped nearly a cent lower and moved to an 11-day low.
It’s hard to see many positives for the Pound at the moment with all of this no-deal Brexit chatter, the BoE moving to a more dovish stance, and the UK economy on the brink of a technical recession. However, it might find some reprieve on there being a short squeeze on Sterling sellers, as it is an extremely overcrowded trading position. Any bounce on this though could be short-lived until we see any major change in Brexit.