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Pound Sterling Takes A Beating On Expectations Of A Hard Brexit

The British pound has dropped yet again now reaching a three-month low on fears of a formal confirmation that UK will be pursuing a hard Brexit in its negotiations with the European Union.

The pound sterling was down to $1.1983 on Monday which was a decline of 1.6 percent, the lowest since October 2016. The FTSE however has continued its strong performance with the futures indicating a gain of 18 points. Market observers have said that the drop was a reaction to news that British Prime Minister Theresa May was planning to use an upcoming speech at Lancaster House, Westminster to detail her government’s plans for a hard Brexit which will result in UK losing access to EU’s single market.

May has previously stated that her government will be triggering Article 50 of the EU treaty which starts the two-year long separation process in March this year. Since then there has been no concrete information on Britain’s strategy for the negotiations.

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In a statement Chris Weston, of investment firm IG, said,

The market is now positioning for some fairly punchy rhetoric from Theresa May and this idea of ‘hard Brexit’. A clean break from the single market seems increasingly likely. We also hear from the UK Supreme Court this week amid a market is starting to head towards a ‘hard Brexit’ and the great unknown.

GBP is an out-and- out political currency (it has been for a while) and the prospect of volatility here is now very high.

The prospect of Brexit and the uncertainty surrounding it is impacting the financial industry in several ways. A recent report released by a law firm has shown that the mergers and acquisitions (M&A) activity in the UK is likely to decline sharply in 2017. Baker McKenzie stated in its report that Brexit is not expected to have a significant impact on European transactions particularly if the negotiations are smooth but in Britain M&A activity would be hit as a result of the uncertainty.

According Baker McKenzie and co-author Oxford Economics the M&A values are mostly probably going to fall in UK to $125 billion in 2017 from $340 billion in 2016. Additionally markets are also awaiting policy announcements from the Trump administration after he takes over post the inauguration event scheduled for later this week.

Asian markets in particular are nervously in wait to see if Trump goes through with his campaign pledge to label China as a currency manipulator on his first day in office and slap high tariffs on Chinese imports.

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