The British pound restarted its Brexit-induced downward spiral this week. Since hitting 1.20 to the US Dollar in 2017 following the Brexit referendum, Sterling had been on a slightly elevated path, as investors placed their bets that the EU and the UK would reach a deal that allowed for a “soft” Brexit.
With Boris Johnson now residing in 10 Downing, all bets are officially off. The prime minister made in clear over the weekend that the UK is now preparing for the hardest of Brexits. The pound reacted, now quickly approaching its 2017 low, with many analysts expecting it to sail passed that mark. Just how far it will go is still a very open question, but Morgan Stanley (and others) has suggested it could reach 1:1 (parity) with the US dollar. If that happens, that means the pound has lost over 32 per cent of its value since the referendum.
While some have tried to find a silver lining in the pound’s fall, claiming that exports and manufacturing will increase thanks to the devaluation, those goods will likely only sit on the docks, due to the lack of foreign trade deals.
Any hope of the pound regaining its value will require the UK to quickly rebuild its trade partnerships, a process which is anything but quick. By leaving the EU, the UK is walking away from more than 40 trade deals, all of which will have to be renegotiated. While the UK cannot sign any trade deals while it is still in the EU, it has signed “continuity” deals with 12 countries and regional blocks. However, only one of those countries — Switzerland — is currently a major trading partner with the UK. How long will those other deals take? The US under president Barack Obama estimated it could take 10 years. Canada recently signed a trade deal with the EU, which took 7 years.
Without those deals in place, the pound will continue to languish, likely for years, bringing with it inflation and — ironic considering the pro-British thrust of the Brexiteers — a large influx of foreigners looking for bargains.
