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Pound declines as Brexit-deadline pledge ends honeymoon period

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The pound erased almost all of its gains since the exit poll that predicted a Conservative majority in last week's election and UK-focused stocks fell by over 1 per cent, as the threat of no deal Brexit was revived.

[LONDON] The pound erased almost all of its gains since the exit poll that predicted a Conservative majority in last week's election and UK-focused stocks fell by over 1 per cent, as the threat of no deal Brexit was revived.

Sterling dropped by the most since July after UK Prime Minister Boris Johnson moved to change the law to guarantee the Brexit transition phase isn't extended beyond the end of next year.

Mr Johnson's planned legislation will include legal text to prevent the government from delaying the day Britain stops being subject to European Union laws, even if no new trade terms have been secured in time, an official said.

"The pound is right back where it was before the Dec 12 vote and the subsequent ‘Boris bounce'," said Valentin Marinov, head of G-10 currency strategy at Credit Agricole. "It is fitting that the main culprit for the reversal is PM Johnson himself with his potentially ill-advised decision to block any chance of extending the transition period beyond December 2020."

The pound was 0.9 per cent weaker for the day at US$1.3219 as of 9.10am in London. The currency had climbed to as high as US$1.3514 on Friday as the Conservative Party swept to victory in the UK general election, fuelling optimism there would be a speedy resolution to the Brexit deadlock.

The FTSE 250, the UK's domestically-skewed stock index, fell by as much as 1.5 per cent, with declines for banks and retailers. The FTSE 100, home to a range of multinationals that benefit from a weaker pound, held steady. Sterling weakened by 1.1 per cent to 84.51 pence per euro.

EU leaders have warned it's highly unlikely that negotiators will be able to complete the kind of deal Mr Johnson wants, which he's modeled on Canada's agreement with the EU, in the 11 months between Brexit day Jan 31 and the December deadline. This sets up a fresh cliff-edge for a no-deal split with the EU at the end of 2020.

"In practice it would erode all the positives of a large Tory majority and bring us back to previous position of pound uncertainty rising rather than falling next year," wrote Elsa Lignos, global head of currency strategy at Royal Bank of Canada, in a research note. "If passed, it would mean further pound downside that should be apparent by January."

Still, the UK currency has already recovered significant ground since the election result. A Citigroup index indicates that currency funds have almost completely unwound their bearish bets on sterling. Asset managers have also switched to a net long position position in the pound from a net short before the vote, data from the Commodity Futures Trading Commission showed.

Currency strategists at HSBC Holdings see the biggest surge in the pound since 2017 as only the start of the rally. Prime Minister Boris Johnson's plans to boost spending should give the economy a shot in the arm and help the pound to US$1.45 by the fourth quarter of 2020, the strategists said in a note dated Thursday.

BLOOMBERG