Laurens Maartens, NBWM:

Brexit: May falters and the pound takes a hit

On Wednesday, a Brexit accord still seemed within easy reach. Yesterday, there appeared to be an increased chance that Great Britain could soon exit the European Union (EU) without proper agreements in place. On the foreign exchange market, the British Pound's revival has given way to a distressing decline. This is according to Laurens Maartens of the Dutch foreign currency company, NBWM.

The Brexit chaos is in full swing again. Just a couple of days ago, the UK seemed to be on the right path towards an orderly departure from the EU. Now, there is every indication that the possibility of reaching an agreement is further away than ever.

On Tuesday, Theresa May, the British Prime Minister, reached an agreement with the EU over the Brexit conditions. She seemed to get support from her own government for this on Wednesday. With this, two of the three most important hurdles were overcome.

May falters
However, after scaling the second obstacle, she was thrown completely off balance. It may well be that May has stumbled before reaching the third hurdle - gaining support for the deal from the House of Commons. 

On Thursday morning, it came to light that the British government was less united about the Brexit agreement than May was led to believe. Brexit Minister, Daniel Raab, announced his resignation. In his opinion, the deal threatens Great Britain's unity.

Looking voters in the eye
After all, no hard border is planned with Ireland. This, while controls must be in place between Northern Ireland and the mainland. It could also take a considerable length of time before the country cuts ties with the EU for good.

A short while later, Labor Minister, Esther McVey, also walked out. She said she would no longer be able to look voters in the eye if she were to agree with the deal.

Motion of no-confidence
The screws were further tightened on Thursday afternoon. Jacob Rees-Mogg filed a motion of no-confidence against May. It remains to be seen whether he will receive enough support for this from Parliament.

Even if this succeeds, the question remains - will the majority of members in the House of Commons want to sell-out the Prime Minister? If this is the case, new elections are almost inevitable. All this, while the Brexit deadline of 29 March looms ever closer.

World of difference
This flare-up of political uncertainty has put a complete damper on the Pound's exchange rate gain. After news about the EU deal broke, the currency climbed by nearly 1% against the Euro. However, on Thursday, the Pound fell by 2%.

This kind of exchange rate fluctuation is likely to occur more often in the coming weeks. There is, after all, a vast difference in the economic impact of a Brexit with good agreements in place and one where the UK leaves with no agreement at all.

Pound: all or nothing
This difference became evident when a group of foreign exchange specialists recently visited the British asset management company, Schroders. With a Brexit without any good agreements, the Pound-Dollar exchange rate is expected to be around 1.10 to 1.15.

With a solid deal, that ends up in the region of 1,40. The current exchange rate (Thursday) is 1,28. The feint movement of the last few days is but a foretaste of things to come - the Pound is going to move in a definite direction over the next few months.

Laurens Maartens (laurens.maartens@nbwm.nl) is a foreign exchange expert at the Nederlandsche Betaal & Wisselmaatschappij. He started his career in 1998 at the Swiss bank, UBS. Since then, he has worked at various local and international companies. He comments on current currency developments in newspapers, on websites, and the radio. He also gives lectures and training to business people in the area of currency management. Here, he stresses to participants to mainly choose simple, cheap foreign exchange products. This column reflects his personal opinion. This information is not intended as professional investment advice or a recommendation to make certain investments via the Nederlandsche Betaal & Wisselmaatschappij NV.


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