- Concerns of hard Brexit on the rise
The week started with rising concerns for the Brexit with U.K. Prime Minister Theresa May’s statement last week announcing that she would trigger Article 50 in March next year. As there is no indication of negotiations between the U.K. and the EU member states up to now, and no sign of a draft plan from the U.K. government, the market took developments as a possibility of a hard Brexit.
With May’s famous quotation, “Brexit means Brexit” and Article 50 means a ticking clock for two years for the U.K. to complete a massive list of chapters to come up with a sustainable deal for the economy.
There has been no respite for the pound this morning after Friday’s flash crash, says Kathleen Brooks, research director of City Index according to The Guardian.
She fears that talk of a ‘hard Brexit’ has spooked the market, and made the pound ‘toxic’. However, she is not the only one with such fears at the moment. This week, in particular, there is a likelihood of some more calming messages from the U.K. government emphasizing that it will not have a hard snap exit from the union. Even though the U.K. voted to leave in the referendum on June 23,
it has continued to enjoy ongoing trade ties as a member up to now, and the market and investors’ reaction have been somewhat limited.
Nonetheless, it might not be the same from now on as May pointed out that five months later, the U.K. might trigger Article 50, which only allows two years for the U.K. to complete a deal.
Last week the pound was pummelled in the currency markets on Friday’s Asian trading, with traders blaming concerns over Brexit and a flash crash that hit the market. The pound briefly fell 6 percent to $1.1841, the biggest move since the Brexit vote.
Chancellor Philip Hammond has responded to the flash crash in sterling saying that market turbulence is to be expected, but the U.K.’s economy is fundamentally strong. However it seems that markets need to see the draft plan or some healthy negotiations between U.K. and the EU.
The pound opened the week stabilizing at the tight range of 1.2366 – 1.2472 against the U.S. dollar.
“Of course, Friday’s flash crash is not representative of the value of the sterling in the mid-term; nevertheless, the recent incident has been a good test for the currency, as it gave some visibility on the depth of the pound market and the lack of liquidity following the U.K.’s decision to leave the EU, yet more importantly, warned of a further downside potential on the back of the Brexit concerns,” according London Capital Group Senior Analyst Ipek Bornand Ozkardeskaya.