Pound Sterling 'Shaken' by Possibility of No-Deal Between UK and EU

Pound Value at $1.3166... Down 0.85% from Previous Day
"Hard to Handle Both COVID-19 and Brexit"

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Jeong Hyunjin] When UK Prime Minister Boris Johnson set the deadline for trade negotiations with the European Union (EU) to the 15th of next month and indicated that he would not hesitate to accept a 'no-deal' Brexit, the market was engulfed in uncertainty, with the value of the pound sterling falling.

According to Bloomberg and others on the 7th (local time), the pound-dollar exchange rate closed at $1.3166 per pound, down 0.85% from the previous trading day. The pound exchange rate had fallen to $1.1485 in March when the COVID-19 pandemic began in earnest, then rose to $1.3384 on the 1st of this month, marking the highest level since June 2018. On the same day, the pound's value against the euro also dropped 0.63% compared to the previous trading day.

The depreciation of the pound came amid conflicts between the UK and the EU. Ahead of the 8th round of negotiations on the 8th, Prime Minister Johnson increased pressure by notifying the EU of the negotiation deadline. Additionally, the UK government is expected to include provisions in the Internal Market Bill, to be announced on the 9th, that do not fully comply with the existing EU withdrawal agreement related to Northern Ireland, which has provoked opposition from the EU. Ursula von der Leyen, President of the European Commission, and Michel Barnier, the EU's Brexit negotiator, responded by stating that there is an obligation under international law to adhere to the withdrawal agreement, and that compliance is a prerequisite for new trade negotiations.

Petr Krpata, a foreign exchange strategist at ING Bank, said, "The 'Brexit fever' has returned, and the pound is not yet prepared," analyzing that if Brexit-related negotiations worsen, the pound could reach a level similar to the euro within weeks.

The problem is that trust between both negotiating parties is breaking down. The Guardian reported that it obtained a diplomatic document prepared by the EU, which suggests that the EU distrusts Prime Minister Johnson. The document reportedly expresses concerns that Johnson is suspected of delaying agreements on key issues, including fisheries, until the last minute, that the complexity of the matters makes it difficult to reach an agreement through phone calls between leaders, and that time is too tight to resolve the issues. There are only two negotiation sessions left before the deadline set by Johnson, raising doubts about whether an agreement can be reached within that timeframe.

However, the possibility of last-minute coordination is not completely ruled out. Bloomberg reported that economists from Goldman Sachs, JP Morgan, and Morgan Stanley expect that a trade-related agreement will be reached in time before the end of the transition period in late December. They explained that accepting a no-deal Brexit would pose a significant risk amid the economic difficulties caused by COVID-19 in the UK.