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The British Pound Takes A Pounding

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Includes: DGBP, EWU, FKU, FLGB, FXB, GBB, HEWU, UGBP
by: WWS Swiss Financial Consulting SA
Summary

31st October 2019 is the deadline for Brexit.

PM Boris Johnson has prorogued Parliament.

A No-Deal Brexit is likely.

The British pound sterling has suffered.

The Deadline

The 31st of October is the most likely date for a final decision on Brexit. It's ironic that Halloween (All Hallows` Eve) should be the deadline for Brexit. It seems that the EU might be taunted with the traditional “Trick or Treat” since it's not clear what Parliament is going to do. The EU is unlikely to grant any further postponement of the date for the exit of the UK from the EU.

PM BoJo

Prime Minister Boris Johnson has made the political move of proroguing Parliament until the 15th of October 2019. This gives Parliament very little time to do anything before the 31st October deadline. It should be clear that the Queen formerly acquiesced in the Prime Minister`s request as a matter of course since the Queen practically has to give her consent to the Prime Minister`s request and the proposal should be understood to be a political move on the part of the Government.

Proroguing Parliament, which means adjourning Parliament for a certain period, is not at all a revolutionary attempt at subverting the Constitution. It has been done various times in the past. Prorogation means that the MPs go home and Parliamentary work is suspended. An election is not necessary. In this case prorogation means that MPs against a No-Deal Brexit would not have sufficient time to put through legislation blocking either any agreement reached by the government with the EU or a No-Deal Brexit. At the time of writing, 3rd September 2019, the opposition promises to promote legislation blocking a No-Deal Brexit or to propose a no confidence vote with the intention of blocking a No-Deal Brexit. There also are rebel Tory MPs against prorogation. If there's a no confidence vote that has a majority, then Johnson will have to call an election. The outcome of this initiative is uncertain. Whatever Parliament does, the deadline will not be extended.

The Likelihood of a No-Deal Brexit

The European Commission worked out a deal with PM Theresa May and it was not particularly favorable to the UK. Subsequent requests by the British representative for changes were met with a negative response. The border between Northern Ireland and the Irish Republic was a delicate point. The “backstop” is a controversial issue. For a detailed discussion of the question see the article by John Campbell: Q&A: The Irish border Brexit backstop.

That makes it clear that the EU is not willing to negotiate the “backstop.” Basically the EU wants the Northern Ireland and the Republic of Ireland border to remain as it is even if the UK will no longer be a member of the EU. This is part of the agreement that the EU insists on for the UK to leave the EU. British opposition to the “backstop” led to the resignation of Theresa May. The new PM Boris Johnson is adamantly opposed to any sort of “backstop.” Given the diametrically opposed positions of the EU and the PM, it's highly likely that there will be a No-Deal Brexit. Johnson may have envisaged trying to convince the EU to change its stance so that he could propose a new deal to Parliament. The political uncertainty surrounding Brexit at the present time certainly does not favor the pound sterling.

The Pound Sterling Suffers

The political questions involved in the negotiations regarding Brexit have had repercussions on the exchange rate of the pound.

In 2015 the pound was trading at around 1.50, which means that one pound sterling was worth US $ 1.50. In 2016 the pound fell to 1.40 as the Brexit vote approached. After the Brexit vote on Thursday, 23rd June 2016, the pound fell from 1.40 to 1.22 in October. There was a recovery back to 1.40 due to hopes of a reasonable Brexit deal with the EU, but the deadlock persisted as Parliament rejected the terms of the deal presented by Theresa May. Recently the pound has again fallen and is currently back down to 1.20.

One could say that the market has now “priced in” Brexit. It's likely that the pound will not go much further down even with a No-Deal Brexit. If Johnson succeeds in getting his way and a No-Deal Brexit results, the pound may well go down to 1.10. That it should go as far down as to reach par with the US dollar is unlikely. There will be traders that short the pound at their risk.

President Trump has hinted that the US would be willing to give the UK special conditions on trade once the exit from the EU is accomplished. It's also to be expected that the UK will feverishly try to make trade agreements with as many countries as possible in order to offset the shock of leaving the EU. In any case traders and investors should follow closely developments in the UK.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.