The post-election honeymoon did not last long for the British currency. Boris Johnson abruptly ended the romance with the markets, reviving the threat of a "hard" Brexit.
The pound fell amid reports that the head of the UK cabinet is seeking to prevent the extension of the post-Brexit transition period, which expires at the end of 2020.
According to ITV News, B. Johnson is actively working on assess to his agreement on the withdrawal of the United Kingdom from the EU to exclude such a possibility. The Prime Minister is expected to put the agreement to a vote in the House of Commons later this week. This has raised fears that Albion will not have enough time to reach an acceptable agreement with the EU before Brexit is complete. In other words, old fears about the likelihood of a "hard" Brexit, namely the UK leaving the EU without maintaining access to the single European market and customs union, have returned to the market. These concerns put pressure on the pound, which just last week, reached the highest levels since may 2018 because of the landslide victory of the Conservatives in the early parliamentary elections.
According to the Saxo Bank experts, "The market seems to be rediscovering the fact that brexit-related uncertainty still poses a serious danger to the pound. B. Johnson's tough stance on the development of a trade agreement by the end of 2020 and on maintaining the possibility of a hard exit from the EU may again lead to the game of "who will be the first to get cold feet", so familiar to us over the last three and a half years. On Monday, the pound dived down, and on Tuesday continued to fall. The GBP / USD pair went below 1.3200, completely reversing the post-election rally. There is a risk of retreat to 1.3000, or even lower. "
The fact that the Conservatives will be able to hold a Brexit agreement in parliament before the end of January is now virtually unquestionable as uncertainty remains over the subsequent trade talks between London and Brussels.
B. Johnson argues that the transition period, in any case, will end in December 2020. However, experts are skeptical about such promises since as a rule, it takes years rather than months to reach such agreements.
Sima Shah, strategist at Major Global Investors, said that "B. Johnson's statements that he can resolve the post-transition problems in relations between the UK and the EU within 11 months are quite bizarre. No major country in the world has ever struck a trade deal in less than three years ".
Last Friday, the British Prime Minister promised to spend billions of pounds to improve the economic situation in the country. However, it is unlikely to achieve this in a short time.
British GDP growth is expected to remain fairly sluggish (no higher than 1.5%) and inflation will remain below the Bank of England's 2% target for 2020.
According to EY Item Club economist Howard Archer, unless the UK economy shows clear signs of picking up early next year, there will clearly be pressure on the Bank of England to cut rates.
Tomorrow will be the last meeting of the Bank of England on monetary policy this year.
Most likely, the regulator will leave the interest rate unchanged at 0.75%. The main intrigue is on how many members of the monetary policy committee will vote for a rate cut. There were two at the last meeting. If at least one more is added, market participants will perceive it as a clear signal of a possible rate cut at one of the next Bank of England meetings next year, and the pound will react to this with a sharp decline.
"The Bank of England will continue to worry about uncertainty around Brexit amid concerns about the length of the transition period and the new trade agreement. Also, economic growth is now below potential. It is forecasted to be just below 1% next year. This means lowering the rate to neutral. After that, the Bank of England will maintain a wait - and-see position, but the risks of further cuts can not be discounted, "Deutsche Bank experts believe.