The British pound slid yesterday on news Prime Minister Boris Johnson will outlaw any extension to a Brexit transition beyond the end of next year, reviving fears of a no-deal divorce.
By the late London afternoon, the pound was down by 1.7% against the dollar.
The UK currency had surged late last week after Johnson’s governing right-wing Conservative Party clinched a landslide general election victory.
“Concerns about a no-deal Brexit at the end of the transition period are exerting pressure on the pound,” said analyst Michael Brown at foreign exchange firm Caxton.
In his boldest move since winning a large majority in last Thursday’s election, Johnson will use the prospect of a Brexit cliff-edge at the end of 2020 to demand the EU give him a comprehensive free trade deal in less than 11 months.
The reaction in markets, which had hoped that a resounding election win for Johnson’s Conservative Party would end near-term Brexit uncertainty, was swift.
Sterling slumped as much as 1.5% to $1.3127, giving up all of the gains made on Thursday and Friday after it became clear that the Conservative Party was heading for a big win.
Against the euro, the pound tumbled 1.6% to 84.99 pence , having skyrocketed to a 3-1/2-year high of 82.78 pence last week.
“We have been warning against getting too optimistic on the pound in the run-up to the UK election and now that the contest is over we are turning negative on sterling again,” said George Saravelos, global head of FX research at Deutsche bank.
He said that while a disorderly Brexit was not “inevitable,” it raised the bar for compromise and sent a negative message to business about the economy.
After Britain leaves the EU on January 31, it enters a transition period in which it remains an EU member in all but name while both sides try to strike an agreement on their post-Brexit relationship.
Currency analysts said that markets did not appear to be pricing in increased chances of a hard Brexit, but the post-election Brexit optimism was over.
Some investors had thought that Johnson would use his majority in Parliament to adopt a more moderate approach towards Brexit negotiations.
They now rushed for protection against unexpected swings in the pound, pushing option prices up.
As a result, this sent implied volatility gauges with longer-dated maturities to their highest levels since Friday.
“I don’t think risks are skewed towards hard Brexit pricing at this stage because the end of the transition period is still over a year away,” said Jordan Rochester, a currency strategist at Nomura.
Those fears also sent London’s FTSE 100 shares index into negative territory yesterday, one day after it had risen sharply.
The FTSE 100 gained 0.1% to 7,525.28 points, Frankfurt’s DAX 30 lost 0.9% to 13,287.83 and Paris’s CAC 40 was down 0.3% to 5,968.26 points at the close yesterday.
Johnson won a big majority Thursday on a promise to take Britain out of the European Union by the end of January, followed by a transition period when London and Brussels negotiate a trade agreement.
European leaders have said that the December 2020 deadline would be too tight to complete a comprehensive deal.
Johnson plans to pass a law guaranteeing Britain’s Brexit transition period cannot run beyond the end of 2020, a source in his office said yesterday.
“The move to pass a bill to legislate it was unexpected by some and has raised concerns about a no-deal Brexit once more,” added XTB analyst David Cheetham.
The pound won only limited support from official data showing that Britain’s unemployment rate remains at a 45-year low at 3.8%.
Eurozone stock markets meanwhile pulled lower as euphoria faded somewhat over the China-US trade deal.
Wall Street was slightly firmer in the late New York morning.
Most Asian bourses rose, however, following another record-breaking lead from Wall Street, after Friday’s agreement between the world’s top two economies ended months of wrangling and removed immediate uncertainty.
The deal, which will see Washington wind back some tariffs and China ramp up purchases of US goods as well as change its trade practices, sparked an equities surge that continued Monday in New York, with all three main indices ending at all-time highs.
But while the news has been met with broad relief, observers point out that the deal is only the first – and easiest – part of a wider agreement many think could take years to complete.
from Gulf Times https://ift.tt/2EoFAvk
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