Pound Sterling Tumbles Again as UK Businesses Weigh Brexit Losses

The uncertainty surrounding the Brexit debate in London and the EU’s reluctance to reach a comprehensive Brexit deal with the UK have undermined the private sector confidence of the post-Brexit economic reality on both sides of the English Channel, resulting in both the pound and the euro sliding lower against the dollar.

Kristian Rouz – The uncertainty surrounding the UK’s separation from the EU intensified earlier this week with Westminster failing to coordinate a compelling outlook on the conditions of the Brexit deal with Brussels, and the Scottish government aiming to exit the UK due to their dissatisfaction with the idea of Brexit altogether.

Subsequently, the UK’s private sector, particularly financial services enterprises, started weighing the costs of the lingering unpredictability and mounting political risks, resulting in the pound sterling’s value tumbling on the FX market.

The pound eased 0.9p against the US dollar on Monday to $1.23 as the markets priced in the rising chances of the ‘hard Brexit’ scenario, meaning the UK will sever most of its ties with the continent after initiating Article 50 in March-April 2017. The prospect of another independence referendum in Scotland added to investors and traders’ concern. In the near-term, as the UK and the EU are both preparing to open Brexit negotiations early next year, the European markets are exposed to higher volatility stemming from the political camps on both sides of the English Channel.

In the UK, Prime Minister Theresa May hinted the Chancellor of the Exchequer would compensate the losses resulting from Brexit to British private sector companies as part of the fiscal stimulus package. Therefore, the loss of EU funding could be made up for.

"Brexit is still the major driver in sterling, so May's comments today are a factor and there's also a bit of a Scottish flavour to the day," Jane Foley of Rabobank said.

Yet, there are indirect negative effects of Brexit to business confidence both in the UK and the EU, and unless both sides negotiate a political solution, the ‘hard Brexit’ could be very painful.

The pound, however, was flat against the euro at 83.90p, slightly below its five-month high of 83.05p posted earlier in December amidst Italian banking sector concerns. The current cable/euro dynamics reflect the market perception of the Brexit standoff as equally harmful for both sides.

On Tuesday, speaking before the House of Commons’ liaison committee on Brexit issues, PM May refused to authorise Parliament to take the final decision on the conditions of the Brexit deal with the EU. She also dismissed Scotland's draft proposals for the Brexit talks as impractical, which might result in yet another outcry from the Scottish National Party (SNP).

"Her comments have the potential to be market-moving for the pound, which remains very sensitive to Brexit developments," experts of the Japanese bank, Mitsubishi UFG, said in a paper.

May reiterated her goal as getting the best Brexit deal possible out of the negotiations with the EU, potentially reassuring investors of her cabinet’s commitment to maintain market stability in the Brexit process. A transitional deal with the EU to help companies adjust to the changing reality might be an option, May said.

"It's just another sign that the government is trying to alleviate fears of a hard, cliff-edge Brexit. Whenever you get signs like that, sterling jumps," Viraj Patel of ING said.

Previously, Brexit minister David Davis had said that the UK might consider contributing to the EU budget in order to maintain access to the single market for British enterprises. Such an idea, however, contradicts the original purpose of Brexit as putting an end to Britain paying monetary tribute to Brussels.

In the past two weeks, the pound eased against the dollar by roughly 2pc, and it shed 17pc since the Brexit referendum on 23 June. However, investors have recently been closing their bets against the pound, with net shorts dropping to their mid-September levels, suggesting stability and some upward pressure to the British currency.

"The pound has been dribbling lower as the EU debate trundles on," Kit Juckes of Societe Generale said. "The sense you get is that the UK negotiators still want to have their cake and eat it… and we may have seen most of the optimism that this is going to go well come and go at this point."