The hardest possible Brexit

World of trading

16.09.2020 – Special Report. Now things are getting exciting again at Sterling: because of a British law, negotiations with the EU are on the brink of collapse. This threatens ultra-hard Brexit and even a trade war with Europe. Which should pull the pound down. We highlight the most important factors for traders.

At this point, we had already pointed out some time ago a scenario that now appears to be becoming reality: After the convincingly won election, he is cruelly crushing the EU’s demands.

Internal Market Bill as divorce paper

The House of Commons is expected to adopt the Internal Market Bill or Intermarket Bill. And thus make it clear that London will never be the servant of the European Union in the future. The bill is about London making trade between the four territories of England, Scotland, Wales and Northern Ireland barrier-free. And to bring most of the rights and powers that will finally return from Brussels on 1 January 2021 to Westminster – and not to the Scottish or Welsh Parliament. Which is why the nationalists are raging there. De facto, the Bill would also cancel out the “Irish Backstop”, hated by the Tories.

The hardest possible Brexit threatens

The EU has already deplored the violation of the Withdrawal Agreement and international law – and has set an ultimatum for the end of September to drop the Bill. Which could affect traders and put another heavy burden on the pound. Even the ever competent Michael Every from Rabobank sees new price pressure and possibly even a trade war with the EU. Specifically: “This raises the risk of not just a Hard Brexit, but the hardest of all possible Brexits, one where the well is poisoned and the earth salted. And further: “This might leave Britain without a trade agreement with the Big Three. China is already angry about Hong Kong. And House Speaker Nancy Pelosi of the Democrats thinks that if the Bill is passed, London can forget about a free trade agreement with the USA.

Major trading partner EU

One thing is clear: barely four months before the end of the transition period, there is no sign of agreement on a comprehensive free trade agreement with the EU. Thu Lan Nguyen, foreign exchange expert at Commerzbank, recently warned against this. And that would mean a hard economic break at the turn of the year. Penalty tariffs from January 1 would be a severe blow for Great Britain, Nguyen continued. For 43 percent of British exports of goods and services go to the EU, 51 percent of imports come from the European Union.

Risiko Negativzins

A hard Brexit would be a further blow to the British economy hit by Corona – in the second quarter, Great Britain’s economic output was down 20.4 percent. There is a risk that it will take “several years” before the economy reaches full capacity again, warned Gertjan Vlieghe of the Bank of England. Therefore, the key interest rate is at a historically low 0.1 percent. According to Adam Cole, chief foreign exchange analyst at RBC, Corona and a hard Brexit kept the fear of a negative interest rate alive.

Only an emerging market currency

The Bank of America also recently joined the chorus of sceptics. According to it, the pound could degenerate into an emerging market currency – small and highly volatile. BofA experts suspect that the liquidity of the GBP market will continue to deteriorate until the end of the year – the end of the Brexit transition phase. The pound is therefore less like a G10 currency. Especially as the country’s debt situation is also approaching emerging market levels – with enormously high foreign trade deficits, which would tend to argue for a devaluation.

There’s life in the old dog yet

So the outlook for the pound is not good. But now it is time for a counter position. Because if the market is full of bears – who will sell GBP? So let’s look at the long factors for Cable for a change.
A weak pound has positive medium-term consequences for the British economy. For example, a premature buying frenzy in British industry. A weak currency could therefore counteract any tariffs and also boost tourism. Moreover, the UK is by no means an unattractive trading partner. For example, Johnson has just achieved a major success in free trade: He announced a historic agreement with Japan, which the EU has yet to achieve. Moreover, the close ties between the US and the former mother country are likely to outweigh the errors of a House Speaker who is soon to be deregistered anyway. We suspect a huge free trade agreement – which could be the turning point for the pound.
In short, we think it is premature to report the demise of the Empire. The Bernstein Bank is keeping an eye on the matter for you!


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