The pound lost out versus its major currency counterparts this week, erasing its gains from last week’s UK general election.
In part, this is because UK Prime Minister Boris Johnson has announced that he’ll legislate to “legally prohibit” the UK’s Brexit transition period being extended beyond the current deadline of December 31st 2020. For PM Johnson, this shows that he’s serious about “getting Brexit done” and incentivises the EU to agree a future trade deal quickly.
However, this risks creating a new Brexit “cliff edge” next year for the financial markets, and the UK will either need to agree its new trade terms with the EU in just 12 months - when such agreements normally take years - or default to exporting to Europe on World Trade Organisation (WTO) terms.
As a result, for the world’s money managers, this seemingly undoes the advantages of the Conservative Party’s clear election victory in which the PM won an 80 seat majority. After all, markets had hoped that this would bring the UK some economic and political stability in 2020, in which Johnson could use his enlarged majority to perhaps soften his Brexit approach.
Instead, the PM’s announcement means that the Brexit uncertainty looks set to continue into next year, which may discourage British businesses from hiring new staff or buying new equipment. In turn, this could depress the UK’s economic growth next year, until the UK’s EU trade terms are decided, thereby weighing down sterling too.
Turning to the UK economy, it’s been a downbeat week. Watchdog IHS Markit’s “flash” Purchasing Managers Index (PMI) for UK services and manufacturing in December both arrived below 50, the figure that signals economic growth. This follows November’s contraction, and suggests that UK Gross Domestic Product (GDP) may struggle to expand in Q4, the last three months of the year.
Meanwhile, although UK unemployment held at a multi-decade low of 3.8% in October, UK wage growth eased, while job vacancies fell.
Elsewhere, the Bank of England held interest rates at 0.75%, as widely forecast, yet said that "If global growth fails to stabilise or if Brexit uncertainties remain entrenched,” UK monetary policy may have to be eased. So this has weakened the pound.
Next week, we’ll see what further amendments PM Johnson makes to his Brexit strategy, while there’s no UK economic data due, owing to the festive break.
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