Dubai: Sterling has erased all of its post-election gains over the last two days, after Britain set in stone a firm Brexit deadline, renewing fears among investors of a chaotic exit from the European Union.
Prime Minister Boris Johnson’s government, which campaigned to “get Brexit done,” will use his control of parliament to outlaw any extension of the Brexit transition period beyond 2020 — a move that spooked analysts to warn of further volatility in store for the pound in the coming year.
Sterling has collapsed more than 3 per cent since it spiked to an 18-month high of $1.35 after Johnson’s emphatic electoral victory last week. British equities felt the heat as well with the UK midcap share index (FTSE 250), which comprises of firms with a lot of exposure to the UK economy, fell 1.4 per cent.
“GBP was the main under-performer as the post-election honeymoon for GBP bulls looked to be over on news that PM Johnson will not allow the Brexit transition phase to extend beyond 2020,” said Han Tan, market analyst at FXTM.
“GBP had, for once, well anticipated the outcome of the polls,” said Stéphane Barbier de la Serre, macro strategist at Makor Capital Markets. “Notwithstanding the fact that British economic prospects will remain challenging next year amide trade deal negotiations, we therefore think that, GBP offers limited potential at this stage.”
After Britain formally leaves the bloc on January 31, it enters a transition period in which it remains an EU member in all but name while both sides try to hammer out a deal on their post-Brexit relationship. A comprehensive free trade deal would encompass everything from financial services and rules of origin to tariffs, state aid rules and fishing, though the scope and sequencing of any future deal is still up for discussion.
“2020 could be another volatile year for Sterling, as the UK seeks to shape its future relationship with the European Union by year-end, with the risk of a ‘cliff-edge’ Brexit apparently still on the table,” Tan added. “Should a hard Brexit become likelier as the year progresses, that could prompt GBP/USD to trade closer towards the lower 1.20s.”