Brexit: May falters and the pound takes a hit

A Brexit agreement seemed to be within reach on Wednesday 14 November, but on Thursday 15 November the chance increases that Great Britain will leave the European Union (EU) without any agreements. On the foreign exchange market, the revival of the pound has turned into a painful slide.

The chaos is complete. Just over 24 hours after an orderly exit from the EU appeared to be one step closer, a deal appears to be further away than ever. The British Prime Minister May reached an agreement with the EU on the terms of Brexit. She also seemed to have the support of her own government for this. This cleared 2 of the most important 3 hurdles.

May falters
At the jump over the second hurdle May, however, has been thrown off balance. May may stumble before reaching the third: getting support from the House of Commons. On Thursday, it turned out that the government is less united behind the agreement than May made out. Minister Daniel Raab has announced his resignation. In his view, the agreement threatens the unity of Britain.

There will be no hard border with Ireland, while there will be controls between Northern Ireland and the mainland. Added to this is the fact that it may take a long time before the country can definitively cut ties with the EU. A little later, Labor Secretary Esther McVey resigned. She would no longer be able to look voters in the eye when she agreement agreed.

Motion of distrust
The thumbscrews were further tightened by Jacob Rees-Mogg, who has filed a no-confidence vote. It is a question of whether he will receive sufficient support in parliament for this. Even if that succeeds, it remains to be seen whether a majority in the House of Commons will want to remove the prime minister. In that case, new elections are inevitable, while time is ticking away towards March 29.

Due to the political uncertainty, the exchange rate gain of the pound has evaporated. Following the news of the agreement with the EU, the currency rebounded by almost 1% against the euro. However, on Thursday it fell by 2%. These kinds of price movements are likely to become more frequent in the coming weeks. The difference in economic impact between a Brexit with good agreements and a departure without an agreement is, after all, very large.

Pound: all or nothing
This difference is also clearly apparent from a tour of the currency specialists, which the British fund house Schroders made. In a no-deal Brexit, the expected exchange rate with the dollar will be 1,10 to 1,15. With a solid agreement, that's about 1,40. Currently, this exchange rate stands at 1,28. The feint of the past few days is just a taste of what's to come: the pound will really take a turn in the coming months.

Lawrence Martins

Laurens Maartens is a currency expert at the Dutch Payment and Exchange Company (NBWM). Maartens analyzes current currency developments and also provides lectures and training in the field of currency management.

© DCA Market Intelligence. This market information is subject to copyright. It is not permitted to reproduce, distribute, disseminate or make the content available to third parties for compensation, in any form, without the express written permission of DCA Market Intelligence.