was affected by the rising risk of Britain's no-deal Brexit and the news that Johnson threatened to advance the election. The pound/dollar fell below the 1.20 mark intraday, hitting a new low since October 2016.
As the Brexit deadline approaches on October 31, the deadlock between the UK and EU on the Brexit agreement is still difficult to break, which also puts the pound in a storm. The latest series of economic data confirms the fact that the UK economy is slowing down, which makes institutions worried about the future of the pound.
British parliament and Johnson have a fierce battle
History has been elected Prime Minister in July, Boris Johnson History insists on walking on two legs on the issue of Brexit, on the one hand, put pressure on the EU to modify the existing Brexit agreement, and on the other hand, prepare for a no-deal Brexit. The focus of both sides is still on the protection clause of Northern Ireland "hard border". Johnson is worried that this may cause the UK to remain in the EU's customs union indefinitely, proposing to make a commitment in various arrangements before the end of the transition period as part of the agreement on future relations between the UK and the EU, while the EU insists on an unchangeable position. EU chief Brexit negotiator Barnier said that in order to safeguard the integrity of the EU's single market and ensure that the Irish border 5 border opens, border safeguards must not be removed, which is the EU's biggest concession to non-member states.
As Johnson "accidentally" filed a request for parliament to the Queen of England on 28 last month, the situation of Brexit took a sharp turn. According to the arrangement, the British Parliament, which ended its vacation on September 3, will be reconciled from the 12th to October 14th, which means that before the October 31 deadline, MPs may not be able to pass legislation to prevent Johnson's hard Brexit plan.
In the face of growing opposition within the parliament, Johnson held an emergency meeting of the cabinet on the 2nd, saying that the negotiations with the EU on the Brexit agreement have made some progress, but still emphasized that under "any situation", the UK will leave the EU as scheduled on October 31.
A coalition of cross-party members, including opposition party Labour Party and several former cabinet members, will submit a motion to the parliament today to hold an emergency debate and vote on Brexit, hoping to prevent a no-deal Brexit by regaining control of parliament and seek to further extend the Brexit deadline for three months until January 31 next year.
This is undoubtedly a serious test for the Conservative Party, which has only one majority advantage in House of Commons . Former British Chancellor Hammond, who withdrew from the cabinet due to Brexit, said that he would support a bill to extend the Brexit period and believed that there were enough votes to win. According to British media reports, with former British Business Secretary Clark joining the "defying" camp, at least 16 Conservative MPs have clearly expressed their support for the opposition bill, including many members of the government cabinet during the Cameron and May period. Johnson threatened to disqualify all Conservative MPs who support the bill, preventing them from representing the Conservative Party in the next general election. More than a British government official revealed that if Johnson fails in parliament today, he may propose an early election on October 14. The British general election was originally held every five years, and another general election would be the third general election in the UK in the next five years after 2015 and 2017. And once Johnson loses, he will become the shortest-term prime minister in British history.
James Knightley, an economist at ING of Dutch International Group, said in an interview with the First Financial reporter that in order to break the deadlock of no-deal Brexit, re-election and delay Brexit again are potential choices, and are likely to be the only choice.
Since the Brexit deadline was postponed in April this year, the pound sterling exchange rate has fallen by nearly 10%, becoming the worst performing G10 currency this year, just a short distance from the lows set by the Brexit referendum in June 2016. A reporter from the First Financial Daily found that investors are actively buying in the forward and options markets to hedge the potential risks of sharp fluctuations in the pound exchange rate. The three-month implied volatility of the pound/USD has risen to a new high since mid-April.Sam Lynton Brown, head of European currency strategy at France and Pakistan, pointed out that the depreciation of the pound since early August has been accompanied by a significant increase in trading volume, and investors have focused entirely on the issue of Brexit, and Johnson's position will bring continued downward pressure on the pound. Bloomberg survey shows that analysts expect GBP/USD may fall below the 1.10 mark under a hard Brexit, and the pound is likely to stop falling around 1.19.
Many institutions are even more pessimistic about the prospects of the pound. Howard Davies, chairman of the pound 4 Royal Bank of Scotland, said that the future trend of the pound is not optimistic, consumer spending has begun to be affected, and the pressure on the fiscal policy of Brexit on the British government will also have negative consequences for the pound. Hans Redeker, head of global currency strategy at Morgan Stanley, expects the GBP/USD exchange rate to test its all-time low of 1.05 in 1985. BlackRock fund manager Rupert Harrison is the most pessimistic. He believes that volatility in the pound exchange rate will continue due to the "Chicken Game" between the UK and the EU. In the worst case, no-deal Brexit will cause the pound to fall to parity with the US dollar.
The UK economy is in turmoil
Hard Brexit risk is threatening the UK economy. Data released by the UK's National Statistics Office last month showed that due to the slowdown in global economic growth and uncertainty in Brexit, the UK's GDP fell by 0.2% month-on-month, significantly worsening from the growth rate of 0.5% in the first quarter. This is the first time that the UK economy has fallen into negative growth since the fourth quarter of 2012.
Local manufacturing industry continues to shrink. The PMI of the UK manufacturing purchasing managers index in August was 47.4, a month-on-month decline of 0.6 percentage points, the worst performance since July 2012, with new orders, exports and business confidence all fell to the lowest level since July 2012. IHS Markit Director Rob Dobson said that political and economic uncertainty and tensions in international trade have jointly damaged the performance of the UK manufacturing industry in August, and reducing volatility in the pound is a must if it wants to recover in the coming months.
consumption was once regarded as the hope of the UK's economy in the third quarter, but the reality is not so optimistic. UK retailers association (BRC) released this week data showed that UK retail sales growth further slowed to zero in August, consumers reduced their purchases of non-essentials before Brexit, and many families began to stockpile food. In the past 12 months, the average growth rate of retail sales in the UK has been 0.4%, hitting a new low since the BRC began collecting data in 1995.
Former British Special Envoy to the EU Ivan Rogers published an op-ed article pointing out that it is obviously unrealistic for the Johnson administration to hope that a truly clean Brexit will be achieved in eight weeks. A no-deal Brexit will keep all the toughest issues in the future relationship between the UK and the EU and remain unresolved, and substantive negotiations are far from over for both sides. Future trade relations are likely to be much lower than the current level of single market and customs union member states.
Rogers said that under the current circumstances, many companies will have to plan and make decisions on the premise of assuming that the foreseeable future will lose the existing preferential trade environment. Even if a trade agreement is reached with partners such as the EU in the future, it may be too late. This will be the worst result of the UK economy and public finance, and the impact of the tax burden will make the fantasy of Brexit dividends disappear soon in the public account deficit, marking a common failure of the UK government and the EU.
The financial industry has begun to withdraw from the outside. The ECB said last week that 24 banks will relocate from London to the euro zone, with the expected total asset transfer scale of 1.3 trillion euros, of which 7 banks will be directly supervised by the ECB. At the same time, the UK banking industry is urged to make all necessary preparations in advance, including applying for licenses, orderly transfer of assets, clarifying operating models, and setting up new branches in the EU.
The European Commission said today that a no-deal Brexit is not a situation the EU hopes to see. The current expectation is still to complete the entire Brexit process on October 31, but the possibility of a no-deal Brexit has become unignorable. The pound/USD is now at 1.2070, recovering lost land within the day. Johnson's latest statement said he has made a clear position to the EU and hopes to get a Brexit agreement.
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