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Currency Markets: The UK Quarantine and Brexit – Columns

Britain under quarantine and missed the next Brexit deadline

Anyone who thought a “hard Brexit” would be tough has just been taught better. Because the new Covid mutation is rampant in England and the epidemic has gotten “out of control” there (again), Europe is cutting the connections to the island: air and ferry traffic and the Eurotunnel are closing. Sure, deliveries to the island are still possible. But logistics companies are already pointing out that they are not interested in sending trucks to the island if they can no longer come back. Even just before Christmas. The British horror ideas of a shortage of goods after a hard Brexit get – for a completely different reason – a whole new drive.

In this situation, Europe’s states would have had high priority for epidemiological arguments anyway. Without community solidarity, Europeans’ health response is arguably even less attentive to British concerns than if they were still part of the Union. So much so that it is said that life is so much better on the island alone …

Behind these developments, the news that the Brexit negotiations once again missed a deadline on Sunday fades. Nevertheless, it should be pointed out: Now is too late for any last-minute deal to be ratified by Europe’s representatives. So nothing “final” can be regulated before the end of the transition period on December 31st.

A week ago I wrote about the “because-they-don’t-know-what-they-do” effect at this point. That there is a risk of an accident if both sides wait until the last minute before they are ready to compromise. In the film, Corey Allen had an accident because his sleeve got caught in the door handle when it was too late to brake. Can the new epidemic wave in England be the equivalent of Allen’s sleeve? Actually, the new virus mutation and Brexit have nothing to do with each other in terms of content. One is about short-term health policy-motivated decisions, the other is about regulating long-term economic relations between the UK and Europe. Yet. Because the prospects at the Brexit negotiating table are so bleak anyway and because fighting epidemics is now the top priority, it might seem tempting for decision-makers to allow a hard Brexit first because it makes no material difference in a UK quarantine. However, this would fundamentally change the dynamics of the negotiations on the relationship in the period after the quarantine. Because then “no deal” would be the benchmark. The chance of a materially constructive result would be less. Such a development is certainly not without alternatives. But it has moved into the realm of what the forex market needs to price in as a possible scenario.

The pound logically acknowledged the development at the start of the week with significant weakness. Since I suspect EUR-GBP would be at parity rather than 0.90 in the event of a hard Brexit, the exchange rate reaction is very moderate. Anyone who thinks that the UK quarantine and Brexit have nothing to do with each other can hardly blame the foreign exchange market for having reacted too panic. Those who disagree may find the pound expensive, even at this morning’s levels.

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