Markets

Brexit tremor pushes pound into the cellar

A.n the foreign exchange markets, increased concerns about a hard Brexit without a free trade agreement with the EU have put the pound under pressure again. On Friday the British currency lost more than 1 percent external value and slipped below 1.084 euros. The pound is as low as it was in October and close to the all-time low of EUR 1.065 in March.

There is fear in the markets that the tough negotiations with the EU on a free trade agreement could fail. The EU and London have once again agreed to extend the talks until Sunday evening, but the signals on both sides point to hardened fronts. British Prime Minister Boris Johnson said in a video message that there was a “strong likelihood” of leaving the EU without a deal. EU Commission President Ursula von der Leyen also made it clear on Friday that it was “more likely” that the talks would fail than they would be successful.

In the case of a no-deal, tariffs between the EU and Great Britain would be introduced after the end of the transition period on December 31.

“A deal still seems more likely to me than a no-deal,” said Kallum Pickering, an economist at Berenberg Bank in London. “Time is running out and the current deadlock carries the risk of a tough exit from the EU.” In the event of a hard Brexit, he sees a downside risk of another 5 percent for the pound. If a free trade deal is successful, the pound could go up just as much.

The economist Peter Dixon from Commerzbank in London called a no-deal Brexit “the greatest political failure in the era since 1945”. He pointed out that both sides – the British government and the EU Commission in Brussels – are now pessimistic about the chances of a deal. “Exactly twelve months ago, Boris Johnson won the general election with the slogan ‘Get Brexit done’ and promised the voters an ‘oven-ready deal’”, recalled Dixon. Failure to reach a trade deal now would have great detrimental economic effects.

The pound could then “fall slightly below the previous all-time low of 1.065 euros to 1.05,” says Dixon. In the longer term, it could fall even further if the economic damage becomes more apparent. But if there is still a breakthrough for a trade agreement, he sees pounds sterling at 1.10 euros.

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