Pound Falls on Brexit Uncertainty

by Elliot C. Financial Analyst

The British pound took a sharp dive on Monday, as forex investors expressed concerns over a chaotic Brexit. This followed after UK Prime Minister Boris Johnson struck a tougher tone on the trade accord with the European Union.

The sterling was down more than 1% to 1.3056 per dollar, having gained 1% last week. While the euro rose by 0.8% to 0.8474 against the currency.

The pound’s shortcomings came after it ended January on a positive note, posting its best weekly high in a month. While the fx market cheered for the Bank of England’s (BoE) decision to leave rates unchanged at 0.75%.

The British currency also dropped 1.1% to 1.9497 against the Australian dollar.

Brexit Concerns Weigh on the British Pound

The pound returned to the red territory as the possibility of Britain reaching the end of an 11-month transition period without sealing a deal loomed into view.

While the UK is now in a transitional phase without policy revisions, the country is still at risk of facing an economically disorganized separation. If a trade agreement failed to happen by the end of 2020.

The sterling appears to be coming off on the not very encouraging signs from the two sides at the start of negotiations. They are positioning themselves at two extremes, according to chief currency strategist Adam Cole.

The British currency declined the most in a month, leading weakness among Group-of-10 currencies. As forex traders prepared for Johnson to try to abandon negotiations with the EU rather than agree to Brussels’ demand to adhere to the bloc’s single market policies.

The two parties have until the end of the year, when the transitional period ends, to settle a deal on trade and future relations.

Johnson, however, struck a much tougher tone, stating that Britain will not abide by the EU’s regulations.

The bloc has cautioned Britain that access to its single market housing 450 million people will depend on the extent of London’s compliance to such rules on environmental and labor policies.

Analysts of a Dutch financial group said this will probably characterize negotiations over the next 9-10 months. And stands to drag cable back to the lower end of its $1.29-$1.35 range.

The UK government wants to pursue a harder Brexit trading relationship to allow more room for policy divergence with the EU. Which is seen as one of the key benefits of Brexit, according to forex strategist Lee Hardman.

That continues to pose downside risks for the pound in the year ahead, Hardman added.

Get the latest economy news, trading news, and Forex news on Finance Brokerage.