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Pound Loses Last Week’s Gains Following Boris Johnson’s Exit Gamble

Pound Loses Last Week’s Gains Following Boris Johnson’s Exit Gamble

Published: December 23rd, 2019

– The UK Elections that gave the Tory a huge majority, signaled the beginning of certainty in the country’s economy. The domestic currency took que and gained against Dollar and the Euro. Then, Prime Minister Boris Johnson dropped the bombshell that was his plan to take the country out of the European Union via a hard Brexit…

The first casualty of the prime Minister’s somewhat reckless announcement about the UK coming out of the UE via a hard Brexit has been the pound. In the anticipation of a rate decision from the Bank of England, however, it looked set to gain, rising modestly against the major currencies only to slump again due to the bank’s stance to maintain the status quo.

It still is confusing figuring out how these two factors would have affected the pound. With the cat out of the bag, however, …

Is the UK Emerging from Brexit-Brewed Tough Times?

The UK economy has not been in great shape for months. The uncertainty was caused majorly by the confusion over the Brexit proposal that the UK adopts. Earlier attempts by the former prime minister Teresa May to pass her deal through the House of Representatives failed three times. The confusion lost her the prime minister’s role, circumstances that hoisted Boris Johnson to the helm at 10 Downing Street.

Exit May Enter Johnson…

Now, Johnson has believed that the UK leaves the EU the soonest possible. And, just soon after his Conservative Party’s majority win, he presented an exit plan to the house. His proposal seeks to get the UK out of the EU by the end of 2020 without the option of any legal extensions.

The Prime Minister on Tuesday ruled out extending the Brexit deadline to make time for trade negotiations with the European Union. Instead, Johnson’s government sent the country on a new Brexit anxiety mode, in the process, cutting short the impressive rally that the Sterling Pound had started becoming accustomed to.

The currency fell 0.3% from an 18-month high where it got to just days ago following Johnson and his Conservative Party’s majority win in Thursday’s General Election.

The result saw the pound trading at $1.3105 against the dollar and 0.2% against the Euro to stand at €1.19.

Analysts predict the fall to the spontaneity of the news. Thu Lan Nguyen, a Forex strategist at Commerzbank quipped that the Brexit agenda made a quick and dramatic turn, a lot sooner than most traders had anticipated.

According to her, the drop in the pound is a market correction following the election euphoria. She added that the unfolding currency trends are a result of the people realizing that the Brexit drama is not over and done, and that they have to contend with another deadline and a hard Brexit before the year ends.

Her thoughts are shared by Rupert Harrison, Blackrock’s portfolio manager. Harrison implied that the plans by the prime minister have adversely affected the pound. Opining in a tweet, he said that the simple fact that the Tory won a majority is not enough to reduce or eliminate uncertainty and set investments on firm ground.

According to him, the government needs to make it clear that it has a plan for the economy instead of actions that will create disruption in the process.

Nil Effect from the Surprising Bank of England Rates Announcement

Despite this seemingly major tumble, it earlier looked like the pound was bound for a climb. The currency surged, though moderately, probably buoyed by the expected good news about the Bank of England rates.

When the announcement came, however, the pound assumed a further downward trajectory after the bank decided to maintain a neutral interest rate decision.

The announcement on Thursday dispelled the concerns in the money market that the BoE would cut the rates. The statement from the bank, as such, was not enough to inspire the pound to continue on its upward climb.

No-Deal Brexit is Catastrophic

Previous concerns had been that a no-deal Brexit would affect the UK economy badly. This has been evident from the markets with the pound falling sharply against all the major currencies every time there is a likelihood of the UK crashing out of the EU without a deal.

This fact, notwithstanding, the shock in the market was clearly visible. Financial markets at large and investors, in particular, were appalled by the measures the Prime Minister is ready to take to get out. It is a lot unlikely that any meaningful deal can be worked out within the remaining period.

Johnson’s act has sent the investors into another cliff-edge, emitting shockwaves into the markets just when the elections had signaled a likelihood of stability.

In another development, a statement by the Global Bank noted that the news that the Prime Minister seeks to amend the EU withdrawal bill to do away with a Brexit transition period that extends beyond December 2020 hurts the market.

The statement added that though the action does not guarantee that there will be a disorganized Brexit, it takes away the hope of there being a more grounded policy from the government by early 2020. The statement added that a lack of a pivoted Brexit policy may even spur the risks of a recession in the UK.

With the ground shaken as it is now, the markets predict a volatile pound that trades between 1.30 and 1.40 between now and mid next year.

In Summary

The tragedy of the pounds and its mixed returns continue into the weeks of Christmas and New Year with the only sure aspect being the uncertainty that is now almost gloomily permanent over the UK economy. Markets had hoped that the Tory majority would free up Johnson and afford him adequate time to negotiate for a better deal for the UK to leave the EU. The gains in the pound were a result of this optimism. The hopes, however, were doused on Wednesday, December 18, 2019, when the Prime Minister ruled out chances of legally extending the transition period; sending the pound slouching again.