Pound takes breather as backstop impasse continues

Pound takes breather as backstop impasse continues

After falling 2.78% against the Euro and 2.63% against the Dollar in the past week, the Pound appears likely to continue its slide with persisting political uncertainty between the UK and EU, as well as domestically in the UK.

Despite rising slightly today, any rally is likely fleeting; with Sterling dropping to a two-year low against the Euro at 1.0888 yesterday, and a two-year low against the Dollar at 1.2164. This forward looking pessimism is corroborated by market analysts today, after a phone call between incumbent UK prime minister Boris Johnson and Ireland’s Taoiseach Leo Varadkar, which did little but confirm a lack of progress in discussions on the Irish backstop and ultimately on the Withdrawal Agreement.

In a statement, a Downing Street official stated the following,

“The prime minister made clear that the UK will be leaving the EU on October 31, no matter what,”

The prime minister told his Irish counterpart that any deal would hinge on the removal of the Irish backstop, and that the UK would not impose any physical restrictions on Irish goods.

“The prime minister made clear that the government will approach any negotiations which take place with determination and energy and in a spirit of friendship, and that his clear preference is to leave the EU with a deal, but it must be one that abolishes the backstop,” Downing Street said.

“The Taoiseach explained that the EU was united in its view that the Withdrawal Agreement could not be reopened,” the Irish government said.

“Alternative arrangements could replace the backstop in the future… but thus far satisfactory options have yet to be identified and demonstrated,” the Irish government said.

The Pound Forex outlook

Based on today’s correspondence, the macro, and micro political climate, the market’s outlook on the Pound is bleak. Responding to the news and looking ahead, CEO of financial advisory service de Vere, Nigel Green, said the following,

“The pummelled Pound is going to continue to be battered either way in the short to medium-term under Boris Johnson or Jeremy Corbyn, says the CEO of one of the world’s leading financial advisory organisations […] There is no end in sight to the embattled British pound’s plight with both the current Prime Minister Boris Johnson and the leader of the official opposition Labour Leader Jeremy Corbyn promoting policies that will deliver fresh – and serious – blows to the currency.”

“Should the UK leave with no-deal, the Pound can be expected to remain weak for several years until the country and the bloc readjusts […] In addition, many observers predict that there will be a general election before the end of the year. All by itself this too will create uncertainty and therefore turbulence for Sterling.”

He finished his statement with the following declaration, “should a Corbyn-led Labour party win that election, there will be even more bad news for the Pound. His anti-business rhetoric, and high tax and low-profit policies would lead to considerable and sustained selling of the Pound.”

So, the focus is not solely on Brexit. Markets are fearful of Johnson’s do-or-die approach and are equally, if not more afraid, of the potential realisation of Corbyn’s seeming lack of interest for preserving the market status quo. Any movement in the Sterling will dependent on Boris’s progress in negotiating a deal – or lack thereof. Should a no-deal scenario become a reality, the UK can only hope to emulate the rally in exports witnessed in 2016, and hope more is done by small business to make the necessary preparations for uncertain market conditions.