Overseas markets have been rather jittery over looming Brexit fears. With the U.K government’s tough position on Brexit negotiations showing no signs of backing off, the British pound is approaching a historic low as investors worry the country could crash out of the European Union without any sort of exit agreement.
Worries about a “hard” Brexit have always been in the minds of investors but hasn’t been reached such a feverish pitch due to Theresa May’s challenges in making any sort of deal come through.
Instead, new party leader and Prime Minister Boris Johnson, who came into office last week replacing his predecessor, has been vocal about his intent to get the country out of the European Union at any cost by the next deadline of October 31st. Over the weekend, a top official overseeing no-deal preparations scared investors when he stated that the British government was “operating on the assumption” of a hard Brexit.
In response, two days of heavy selling in the markets have sent the sterling crashing towards its lowest level against the dollar not seen in over two years. On Tuesday morning, the currency fell as low as $1.2091 but ended up regaining a bit of lost ground later that day. The pound is still a little above its lowest point since the original Brexit vote back in 2017, which sent the currency down to $1.2065. Should the pound end up falling to that point, it would cross a new low against the dollar not seen in almost 34 years.
“People had thought that Boris Johnson may soften his stance once he was in power, but now the market is realizing that a no-deal Brexit is a very real possibility,” said Seema Shah, chief strategist at Principal Global Investors according to The Wall Street Journal. Some experts have gone on to warn that if the pound doesn’t remain at least at its present level, that could push inflation up by an extra 1 percent in 2020. Samuel Tombs, chief U.K. economist at Pantheon Macroeconomics added that “I don’t think it’s a price worth paying for an unpopular no-deal Brexit. It will hurt households in a very real way.”
At the moment, analysts are now predicting that the probability of a hard Brexit is between 35 to 45 percent, up from 20 to 30 percent from the start of July. British investors worried about the health of the U.K. economy have fled to government bonds as a source of safety. The yield on the 10-year bond ended up falling by 1.3 basis points on Tuesday down to 0.641 percent, which is the lowest seen in three years.
On the other hand, U.K. equities have remained less impacted by the volatility of the pound, mainly because a number of these large companies that trade in London are international businesses whose prosperity isn’t linked to the British economy.
The FTSE 100 index stayed roughly the same on Tuesday, and historically has moved in the opposite direction of the pound 71 percent of the time over the past month. So far, the FTSE 100 is up 22 percent since the Brexit referendum of 2016.
