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Will the Falling Pound Cushion Brexit's Blow? 

Mike Riddell 

 

Mike Riddell

12/1/2016 

Britain's economy didn't roll over post-Brexit, but the pound has dropped in response to increasingly tough political rhetoric about a "hard" exit. Mike Riddell wonders whether a further drop in sterling might prompt the government to soften its stance.

Is Brexit Good for Britain?

Britain's economy was supposed to roll over in the aftermath of the Brexit vote. But based purely on the high-frequency UK economic data, one could make the case that Brexit looks to have been a good thing for Britain. That's a very dangerous outcome for European Union (EU) politicians desperate to avoid an EU exodus. They now have an incentive to make Brexit as painful as
EU politicians have an incentive to make Brexit as painful as possible for the UK
possible for the UK, even if it means the ultimately self-defeating prospect of wounding a country that buys the second-highest amount of euro-zone exports.

Things look far less rosy for the UK if you judge its health by the foreign-exchange market. Immediately after Brexit, the pound fell 7.6 percent against the US dollar, the ninth-biggest daily move since 1862. This was actually a smaller drop than many had expected, which tells you a lot about the pound's positioning going into the vote.

Sharp Drop in Pound

Three months of pound stability followed, but the first two weeks of October saw another sharp move lower. UK Prime Minister Theresa May suggested that the UK is heading for a "hard" Brexit, with the UK giving up access to the single market in order to restrict the free movement of people. She also stated that
Teresa May said the Brexit process will officially start in March 2017 with the triggering of Article 50
the Brexit process is anticipated to officially start in March 2017, with the triggering of Article 50; ironically, this could mean that the UK might leave the EU two years later—on April Fool's Day, 2019.

Brexit uncertainty is not being helped by the fractious state of British political parties. The Labour Party is failing to provide sufficient opposition to the incumbent government due to an internal division between Labour's leader, Jeremy Corbyn, and its members of parliament in the House of Commons. For its part, the House of Lords is unlikely to step outside of its historical role of refining proposed laws in order to effectively provide scrutiny over the government's plans. This dysfunction means, as HSBC has noted, that the British pound sterling is now effectively functioning as the opposition to the government.

Financial markets can signal their opposition to this state of affairs, but they cannot formulate policy.
Things look less rosy for the UK if you judge its health by the foreign-exchange market
While the pound's further fall might lead May to be more attuned to the desires of the 48 percent who voted to remain—or to the 52 percent who in a recent poll revealed that they would prefer a "soft" Brexit—further political opposition will be needed to soften the government's hard Brexit goals.


The material contains the current opinions of the author, which are subject to change without notice. Statements concerning financial market trends are based on current market conditions, which will fluctuate. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Forecasts and estimates have certain inherent limitations, and are not intended to be relied upon as advice or interpreted as a recommendation.



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