Pound gives up post-election rise as Johnson signals hard Brexit deadline
Sterling has surrendered its post-election gains as Boris Johnson signalled he will seek to pass legislation that could cause a “cliff-edge” Brexit at the end of next year.
The currency slid as much as 1.4 per cent to $1.3141 in afternoon action, bringing it below the $1.3173 level the pound traded at just before an exit poll projected Mr Johnson’s election victory. It fell by a similar margin against the euro to €1.1792.
The pound has tumbled 2.8 per cent from the peak of around $1.35 that was reached on Thursday night after it became clear Mr Johnson had secured a sweeping victory.
London’s FTSE 250 index, which includes medium-sized UK companies that are considered to be sensitive to shifts in the domestic economy, dropped more than 1 per cent in its worst day since October after sharp rises in the two trading days following the poll.
Companies that were seen as beneficiaries of Mr Johnson’s victory such as banks — including Barclays, Lloyds and RBS — and homebuilders pulled back.
Analysts had warned that even as the election result would help to alleviate political uncertainty, risks over Brexit and domestic politics still lingered.
Less than a week after election day, those concerns have come to fruition. Mr Johnson’s government has signalled that it will attempt to ram legislation through parliament this week that would leave the prime minister obliged to make a trade deal within months or take Britain out of the EU on World Trade Organization terms.
“The pound’s latest slide is symptomatic of the fact that Brexit is a way off being done, and will remain important for sterling over the coming months,” said Dean Turner, economist at UBS Wealth Management. “The risk of the UK reverting to trading with the EU on WTO terms could still drive larger sterling moves, particularly given the latest noises coming out of Downing Street.”
The decision may quash the hopes of some executives, investors and EU diplomats who had expected Mr Johnson to use his decisive parliamentary majority to push for a business-friendly Brexit deal that would marginalise hardline Eurosceptics.
But the new plans suggest Mr Johnson will seek rapidly to forge a Canada-style free trade agreement that would focus on goods trade and not services. It would also set a tight deadline for complex talks, creating yet another point in the next 12 months in which the UK could crash out of the EU with no deal in place.
Investors are also beginning to take a closer look at UK economic fundamentals with the election now out of the way, according to Thu Lan Nguyen, currencies analyst at Commerzbank. She said the release on Monday of a gloomy survey on the factory sector “did not constitute a good start in this respect”. An upbeat report on the labour market, released on Tuesday, prompted essentially no move in the currency.
“What would be particularly important would be to find out to what extent the recent weakness of the British economy was due to the Brexit uncertainty, to the trade conflict or even structural factors,” she said.
“If the real economic weakness was to be deeper and therefore longer term this would constitute an ideal breeding ground for rate cut speculation which might weaken sterling at least temporarily.”