The world had a taste of how the markets would react to the UK leaving the EU immediately after the referendum on23/6/16 – Sterling fell heavily against all other major currencies. It is still significantly lower than it was (pre-vote) as investors in forex try to digest the political and other fundamental news that will set the value of Sterling going forward. Just as nobody (well, almost nobody) seriously expected the British to vote to leave the EU, few people imagined that the UK could leave the EU without a substantive trade deal in place with it. However, as the chaotic negotiation process has gone on and the strains within cabinet, government, the Conservative party and the opposition Labour party have been increasingly laid bare, the prospect of a no deal exit (probably by accident) and an abrupt, chaotic departure with no transitional period have become more realistic.
Neither the UK (government, well most of it!) nor the EU want to see a chaotic Brexit; the challenge of Mrs May to find common ground within her own party and the means of securing slender majorities in parliament is almost insurmountable. In order to avoid a rebellion within the Brexit ranks of her own party, she has had to agree to compromise positions which will be all but impossible for the EU to accept.
Despite the PM’s spokesman suggesting that she is confident of a deal (the no deal is better than a bad deal rhetoric has been retired), the Brexit trade minister, Liam Fox, put no deal at 60%. The warnings of Mark Carney, the governor of the Bank of England (see yesterday’s post) and those of major industry leaders such as Jaguar Land Rover, Airbus Industries and SMMT, have had an effect on market sentiment. The Pound has slipped to a fresh nine month low against the Dollar and has slipped against other major currencies as forex investors adjust their positions against the prospect of a chaotic Brexit – if (by some miracle), Brexit is averted or a deal is struck, it is likely that Sterling will rebound strongly. Continued bad news will push the currency lower.