In the past few weeks, sterling
has become one of the worst-performing currencies in the developed world. The
currency is trading at the lowest level it has been since March 2017 when the
parliament triggered Article 50. The reason for the declines is that investors
are pricing-in a situation where the United Kingdom will exit the European
Union without a deal.
Most of their worries are from Boris Johnson, the new prime minister of the country. Boris, who campaigned for Brexit has warned that he is not afraid of leaving the European Union without a deal. He has put in place a cabinet of members who campaigned on Brexit. In addition, he has continued investing resources to prepare for Brexit.
It will be a difficult thing for
the UK to leave the EU without a deal. In such a situation, it will be
difficult for the UK and the EU to do free trade. This is a major issue because
EU is the biggest trading partner of the UK. In 2018, the UK exported goods
worth more than 289 billion pounds, which is 46% of all UK exports. On the
other hand, UK imported goods worth more than 345 billion pounds, or 54% of all
imports.
Many rules, permits and accords
will disappear. Data sharing across the two regions too will disappear and
contracts will become invalid. Further, UK citizens in the EU will be stranded
and vice versa.
While such a scenario is negative,
Brexiteers like Boris Johnson believe that leaving the EU without a deal is
much better than remaining in the bloc. They also believe that the deal that
was negotiated by Theresa May would technically leave the UK in the EU. They
call it BRINO (Brexit in Name Only). By leaving the EU, they argue that the
country will be at a good position to negotiate trade deals with the rest of
the world.
While Brexiteers have a point, the reality is that exiting the region without a deal would be challenging for the EU. According to the Bank of England, a no-deal Brexit could cause the EU economy to shrink by 8% within the first year. It would also cause property prices to shrink by a third. Other impacts are custom delays, which would lead to shortages of everything from important medicine and foodstuff. In addition, a hard border could emerge between Northern Ireland and Republican of Ireland, which would threaten peace. There is also a likelihood that Scotland would demand a new referendum on independence.
Under Boris Johnson, the UK has started preparing for a no-deal Brexit while the EU has told companies to prepare for the worst. Belgium and the Netherlands, which are close to the UK have led the way by hiring more border officials. Companies, on the other hand, are stockpiling.
The uncertainties about Brexit have led to a sharp decline of the sterling as shown in the chart below. The pair has reached at the lowest levels since March 2017. These levels reached below the short, medium, and long-term moving averages while the RSI is in the oversold level. The pair will likely continue moving lower as the uncertainty continues.
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