MARKET MESSAGE

The plunging pound is the only thing standing between Britain and a “hard Brexit”

Obsession
Brexit
Obsession
Brexit

Three months, some bad trading days, and one “flash crash” after the UK voted to leave the EU, the British pound is down around 17% against the dollar, hovering near multi-decade lows.

And how’s this for a coincidence? In a new poll of British voters, support for the Conservative party is also bucking historical trends: The party of prime minister Theresa May, charged with taking the UK out of the EU, is now 17 percentage points ahead of the opposition Labour party. This margin has been wider only once since 1992, according to pollster ICM.

David Bloom, a currency analyst at HSBC, said in a recent research note that the pound is now “the de facto official opposition to the government’s policies.” With Labour riven by infighting and falling far behind the Tories, this is prescient:

May and her government appear to be steering Britain towards a “hard Brexit,” in which few—if any—of the UK’s preferential terms of trade with the rest of Europe are maintained after the country departs the club. This is because the prime minister appears to be stressing stricter control of the country’s borders above all, betting that immigration trumps other concerns for post-Brexit Britain. And the polls support this view.

But markets seem spooked by the UK losing the tariff-free access to EU markets, which Brussels says is non-negotiable if London imposes limits on immigration from EU countries. A weaker pound cushions against the effect of tariffs, but when the currency drops so far, so fast, it doesn’t promote the stability that companies want when making plans or investors seek when committing capital.

With Labour increasingly irrelevant—too distracted to put up much resistance, and steadily losing support from voter blocs it once took for granted—the only check on Brexit as envisioned by May and her cabinet is, as Bloom says, the damage wrought by a rapidly depreciating pound. Bloom’s team at HSBC reckons that sterling will fall to $1.10 by the end of next year, a further decline of more than 10% from current levels.

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