A ‘No Deal’ Brexit to Bring Volatility to the Pound

Reader's Digest Editors

Brexit continues to dominate the headlines and influence both the short- and long-term direction of the British pound sterling (GBP).

In the last week of September, it was former Foreign Secretary, Boris Johnson, supplying the sauce. After being accused of lacking new ideas, Johnson detailed a 6-point Brexit plan designed to pile even more pressure on the UK’s Prime Minister, Theresa May, who continues to call for a more sober and measured approach.

Johnson vs. May

Johnson’s first proposal was to do away with May’s ‘Chequers agreement’ which was designed to ensure a smooth exit. The agreement sought to ensure that London maintains close and friendly relations with Brussels, and it also included a proposal to form a common rulebook for both parties. This, however, Johnson argues, would limit UK’s ability to discuss better deals with other regions.

The second point was to do away with the Irish backstop, which was signed last December. The backstop was drawn up to ensure that there was no hard border between Northern Ireland and the republic, after Brexit. May’s backstop proposal was also to ensure that UK remains in the customs union during the transitional period until December 2020, while Johnson wants the backstop to be negotiated afresh and new withdrawal guidelines put in place.

Thirdly, Johnson wants the UK to negotiate a ‘SuperCanada’ deal with the EU. This would see the United Kingdom attain a basic free trade agreement for goods, services and technology; while simultaneously retaining the leeway to negotiate long term trade deals with other countries such as the US, China and India. Critics have already poked holes at this suggesting saying that such an offer is impossible because it is simply not available.

Johnson is actively pursuing a hard Brexit that will see the UK disentangled completely from the EU. In this regard, he wants the UK to invest heavily in border controls. His fifth proposition to May is that the UK Prime Minister prepares for a ‘No Deal’ Brexit.

The sixth point in Johnson’s Brexit plan is for the UK to start trade negotiations with other countries from April 2019, shortly after the formal exit from the EU.

Impact on Johnson’s Hard and ‘No Deal’ Brexit on the Pound

A ‘No Deal’ Brexit means that the UK will be leaving without a preferential agreement on both short- and long-term trade terms with the EU. This would bring uncertainty on the economy and will pressure the pound sterling lower, for the meantime.

Financial markets have always reacted negatively to hard Brexit headlines, with the pound usually the biggest casualty. There is also the possibility that major holdings will dump their pound reserves in the event of a ‘No Deal’ Brexit and this might increase the misery for the Queen’s currency.

But Johnson remains a politician and some observers believe that his proposals are merely political. More specifically, they might be a negotiation tactic to push for a more favourable deal with the EU.

If this is the case, we might see more compromises from the EU as negotiations heat up ahead of the Brexit date of March 2019. This has the potential of propping up the pound, which is highly reactive to Brexit headlines.

The official date for UK’s exit from the EU is approaching fast and as a ‘No Deal’ Brexit becomes a realistic probability now; the pound will continue to feel burdened. Still, negotiations will continue to go back and forth, ensuring that pound volatility is here to stay. Either way, the volatility in the pound opens many trading opportunities in the forex market, making FX options trading attractive to investors worldwide.