This is how Brexit hurts pound again

The pound had the wind at its back from rising interest rates in the first months of this year. While UK interest rates are still rising, the focus on foreign exchange markets has shifted to the economic troubles and the threat of another Brexit tussle.

In the financial world, all eyes are on the central banks this week. On Wednesday, the US central bank dared to raise interest rates by three quarters percent for the first time since 1994. Closer to home, the Bank of England (BoE) kept it at a quarter percent increase. That may seem like a small step, but it was already the fifth increase in six months. In 2022 alone, the score is 4-0 in favor of the BoE compared to the European Central Bank. After a good start, however, the British interest rate lead has been little noticeable in the currency markets in recent months.

The trust is gone
The pound fell below the €1,15 mark for the first time in a year yesterday. Just over three months ago, the coin was worth over €1,20. Such a decline is usually the result of developments in the interest rate market. This time, the pound's weakness is mainly due to economic problems. At the beginning of this week it was announced that the economy in the United Kingdom shrank for the second month in a row in April. Growth was negative in the services, manufacturing and construction sectors. But the most worrying thing is the development of consumer confidence. That recently hit the lowest level since these kinds of numbers are being tracked. With the current level of minus 40, there are only two countries in Europe that now score worse: Greece and… the Netherlands.

New problem dimension
The slump for the pound took on a new dimension at the beginning of this week. British Prime Minister Boris Johnson has tabled a proposal to make unilateral changes to Brexit agreements with the EU on trade with Northern Ireland. This naturally came under a storm of criticism from Europe, but BoJo's initiative is not very strange. He has gotten himself into an impossible knot with the Brexit agreement that he concluded more than two years ago. As part of this, there is a free movement of goods between Northern Ireland and (European) Ireland, with a safety net behind it in the Irish Sea. 

Hot summer for the pound
At the moment there are already several cases going on about the holes in that safety net. For example, the United Kingdom must quickly come up with a good statement about the lack of border controls in trade between Northern Ireland and the island. Failure to do so within two months could result in some very hefty fines from the European Supreme Court. In view of these pending issues, the EU is holding off on increasing political pressure through official channels. But it is already showing that a new Brexit quarrel is only a matter of time. And that's extra fuel to the fire of the hot summer which the pound seemed to be heading for.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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