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Pound sterling slumps on new Government warnings of no-deal Brexit

The currency was down 0.36 per cent against the dollar at $1.2959, close to an 11-month low

Economics Editor

Monday 06 August 2018 09:08 BST

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The Bank of England governor says a no-deal Brexit will mean higher prices and “disruption to trade as we know it”

Sterling slumped against the dollar again on Monday morning after UK government ministers talked up the prospects of a no-deal Brexit in March.

The currency was down 0.36 per cent against the dollar at $1.2959, close to an 11 month low.

Against the euro, sterling was trading at €1.1212, down 0.2 per cent on the day.

The international trade secretary, Liam Fox, said over the weekend there was now a “60-40” chance of the UK crashing out of the European Union without a withdrawal agreement due to the “intransigence of the EU”.

“Senior Whitehall sources” were also quoted by the Daily Telegraph on Monday saying that if the UK crashes out with no deal “we will make it clear whose fault it was”.

Trade groups and credible economists have warned that the consequences of such a rupture would be disastrous for the UK – and significantly worse for Britain than the rest of the EU.

The biggest issues facing UK on leaving EU

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1/8The biggest issues facing UK on leaving EU

The biggest issues facing UK on leaving EU

Post-Brexit immigration

workers sorting radishes on a production line at a farm in Norfolk. One possible post-Brexit immigration scheme could struggle to channel workers towards less attractive roles - while another may heighten the risk of labour exploitation, a new report warns.

PA

The biggest issues facing UK on leaving EU

Customs union

A key point in the negotiations remains Britain's access to, or withdrawal from, the EU customs union. Since the referendum there has been hot debate over the meaning of Brexit: would it entail a full withdrawal from the existing agreement, known as hard Brexit, or the soft version in which we would remain part of a common customs area for most goods, as Turkey does? No 10 has so far insisted that “Brexit means Brexit” and that Britain will be leaving the customs union, but may be inclined to change its position once the potential risks to the UK’s economic outlook become clearer.

Alamy

The biggest issues facing UK on leaving EU

Northern Ireland-Irish border

Though progress was made last year, there has still been no solid agreement on whether there should be a hard border between Northern Ireland and the Republic of Ireland. To ensure borderless travel on the island, the countries must be in regulatory alignment and therefore adhere to the same rules as the customs union. In December, the Conservative Party’s coalition partners, the DUP, refused a draft agreement that would place the UK/EU border in the Irish Sea due to its potential to undermine the union. May has promised that would not be the case and has suggested that a “specific solution” would need to be found.

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The biggest issues facing UK on leaving EU

Transition period

Despite protests from a small number of Conservative MPs, the Government and the EU are largely in agreement that a transitional period is needed after Brexit. The talks, however, have reached an impasse. Though May has agreed that the UK will continue to contribute to the EU budget until 2021, the PM wants to be able to select which laws made during this time the UK will have to adhere to. Chief negotiator Michel Barnier has said the UK must adopt all of the laws passed during the transition, without any input from British ministers or MEPs.

EPA

The biggest issues facing UK on leaving EU

Rights of EU citizens living the UK

The Prime Minister has promised EU citizens already living in the UK the right to live and work here after Brexit, but the rights of those who arrive after Brexit day remains unclear. May insists that those who arrive during the transition period should not be allowed to stay, whereas the EU believe the cut-off point should be later.

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The biggest issues facing UK on leaving EU

Future trade agreement (with the EU)

Despite this being a key issue in negotiations, the Government has yet to lay out exactly what it wants from a trade deal with the EU. Infighting within the Cabinet has prevented a solid position from being reached, with some MPs content that "no deal is better than a bad deal" while others rally behind single market access. The EU has already confirmed that access to the single market would be impossible without the UK remaining in the customs union.

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The biggest issues facing UK on leaving EU

Future trade agreements (internationally)

The Government has already begun trying to woo foreign leaders into prospective trade agreements, with various high profile state visits to China, India and Canada for May, and the now infamous invitation to US President Donald Trump to visit London. However the UK cannot make trade agreements with another country while it is still a member of the EU, and the potential loss of trade with the world's major powers is a source of anxiety for the PM. The EU has said the UK cannot secure trade deals during the transition period.

EPA

The biggest issues facing UK on leaving EU

Financial services

Banks in the UK will be hit hard regardless of the Brexit outcome. The EU has refused to give British banks passporting rights to trade within the EU, dashing hopes of a special City deal. However according to new reports Germany has suggested allowing trade on the condition that the UK continues paying into the EU budget even after the transition period.

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‘Just-in-time’ corporate supply chains would be severed due to the sudden imposition of customs checks, and retailers have warned of a serious risk to food supplies from the continent.

The new Brexit secretary Dominic Raab has said the government will make plans to ensure an “adequate food supply”.

No deal pound pressure

Reuters Eikon

The governor of the Bank of England, Mark Carney, warned last week that the chances of a no-deal Brexit were “uncomfortably high” and urged policymakers to “do all things to avoid it”.

The BoE raised interest rates to 0.75 per cent last week, the highest level in nine years, but Brexit headwinds meant the increase did little to support the value of the currency.

“The voices forecasting a hard Brexit are becoming increasingly shrill. The [foreign exchange] market is slowly beginning to work out that these people might successfully torpedo a constructive solution,” said Ulrich Leuchtmann of Commerzbank.

Other financial data shows that traders’ “net short” bets on the pound – wagers that the currency will fall in future – are at the highest level in 10 months.

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