Theresa May is organising a meeting of her cabinet ministers to prepare the UK for a no-deal Brexit at the start of September.
To date, negotiations have been extremely slow with two key issues preventing further progress: the prime ministers proposal for a new free-trade area and how to avoid a hard border in Norther Ireland.
A letter that was later put on the conservatives website yesterday stated that ‘’our negotiations on our future relationship have reached an impasse.’’
Earlier this week, international trade secretary Liam Fox stated the chances of a no-deal Brexit were at 60%, which will only continue to rise as we approach the October deadline. Last Thursday, Bank of England governor Mark Carney stated that the chances of a no-deal Brexit are ‘’uncomfortably high’’ just after raising interest rates by 25 basis-points.
In the last seven days, markets have priced in an interest-rate cut by the BoE in 2019 – an unexpected move. The central bank will need to be more accommodative with its monetary policy and may need to cut interest rates if the UK leaves the EU with no deal.
Forecasts compiled by Bloomberg from the world’s leading investment banks show that Sterling may drop by up to 10% should the UK fail to reach an agreement: this would mean GBPUSD at 1.16 and GBPEUR at parity.
With no historical data to work from, it is very hard to establish what the final outcome will be for the UK. However, a no-deal Brexit is extreme and does not suit either side. With no majority in Parliament, a more logical conclusion would be Theresa May taking a softer-stance regarding her Chequers plan which could appease both sides of her party along with the EU.
Brexit risk will continue to create uncertainty in the currency market in the months ahead. Although medium to long term Sterling may benefit from a wave of support and rally to more traditional levels, short term risk needs to be managed diligently.
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