Pound slides as Boris Johnson says no-deal Brexit 'very, very likely'

·7 min read
British prime minister Boris Johnson. UK and EU are deadlocked over obstacles including fishing rights and competition rules. Photo: Gareth Fuller/WPA Pool/Getty
British prime minister Boris Johnson. UK and EU are deadlocked over obstacles including fishing rights and competition rules. Photo: Gareth Fuller/WPA Pool/Getty

The pound plummeted on Friday, down more than 1% against the euro and dollar after UK prime minister Boris Johnson said that a no-deal Brexit was “very, very likely.”

Sterling was down nearly 1% against the euro to €1.0852 (GBPEUR=X) at lunchtime in London and down 1.18% against the dollar to $1.3142 (GBPUSD=X).

On Friday, on a visit to Blyth in Northumberland, the PM told reporters that the government was “always hopeful” and that the negotiating teams are “still out there in Brussels.”

Johnson said: “But I’ve got to tell that from where I stand now, here in Blyth, it is looking very, very likely that we will have to go for a solution that I think would be wonderful for the UK, and we’d be able to do exactly what we want from January 1 — it obviously would be different from what we’d set out to achieve but I have no doubt this country can get ready and, as I say, come out on World Trade terms.”

It has been under continuous pressure since Johnson and European Commission president Ursula von der Leyen confirmed on Wednesday night that “significant differences” still remained, after the PM travelled to Brussels to bridge the gaps.

The two sides are deadlocked over obstacles including fishing rights and competition rules.

Chart: Yahoo Finance
Chart: Yahoo Finance

It comes as Von der Leyen told a press conference in Brussels on Friday that “positions remain apart on fundamental issues.” She said: “On the level playing field we have repeatedly made clear to our UK partners that the principle of fair competition is a pre-condition to privileged access to the EU market.”

But, the UK would not be bound by the same EU ambitions, and Britain would maintain its sovereignty in its decision making, when it comes to certain matter such as environment.

When it comes to competition, she said: “It is only fair that competitors to our own enterprises face the same conditions in our own market.”

“They would remain free. Sovereign, if you wish, to decide what they want to do. We would simply adapt the conditions for access to our market accordingly the decision of the United Kingdom, and this would apply vice versa,” Von der Leyen said.

The EC chief said gaps remain on the issues of fishing rights and that “no solution to bridge the differences” has been reached.

“We understand that the UK aspires to control its waters,” she said. “The UK must, on the other hand, understand the legitimate expectations of EU fishing fleets built on decades, and, sometimes, centuries of access.”

Meanwhile, a Downing Street spokesperson downplayed the EC chiefs lates comments saying there “isn’t anything new.”

READ MORE: European stocks plummet on no deal Brexit fears

On Thursday, sterling experienced its biggest one-day drop in three months against the euro and lowest since. The pound to euro (GBPEUR=X) exchange rate fell 1.30% on to close at 1.0950.

UK and the EU have set a deadline of Sunday to reach an agreement and prevent a chaotic break from the bloc.

Analysts have said that there is a risk that the pound could gap higher or lower as talks could succeed or collapse.

Fawad Razaqzada, market analyst with ThinkMarkets, said: “Well, right now the pound remains on the back-foot because of the uptick in no-deal outcome. And unless there is renewed hopes over a deal, the path of short-term least resistance remains to the downside.

But in so far as the slightly longer-term outlook is concerned, I think it literally is a binary outcome. If a deal is reached, hopefully this weekend, the pound could surge past the 1.35 handle it touched last week, before potentially heading towards 1.40. However, as the markets have – since March – been led to believe that a deal was going to be reached eventually, the greater risk is therefore if the UK departs without a deal. This outcome will probably come as a shock and could see sterling get a good pounding, sending the cable possibly down to $1.20.”

WATCH: Boris Johnson warns there is a 'strong possibility' of no trade deal with EU

"We need to be very, very clear there's now a strong possibility, strong possibility that we will have a solution that's much more like an Australian relationship with the EU, than a Canadian relationship with the EU," Johnson said after a meeting with treaty ministers.

Johnson has been using an “Australian-type” deal with the European Union to suggest a deal is not necessary between the bloc and Britain.

Unlike Canada, Australia — which has a fraction of UK’s trade with the EU — has no comprehensive trade deal with the EU, which leaves its trade mostly subject to tariffs.

Britain could see trade barriers imposed with its main trading partner, the EU, in just three weeks under an an Australian “deal” scenario.

Meanwhile, analysts have said to brace for a swing in sterling and UK stocks as the reality of no-deal looms.

Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown said: “With the UK now looking like its hurtling towards a no-deal Brexit, investors should adopt the brace position for swings in sterling and shares in domestic focused companies. This morning the pound is struggling to rise above 1.095 against the euro with a distinct lack of direction before the fresh deadline of Sunday looms.

“Warnings from prime minister Boris Johnson, that companies should prepare for a no-deal scenario, will not have added to confidence, given that there are just three weeks until January 1st, when WTO rules would come into force.

WATCH: 10 ways to Brexit proof your finances

“However, investors would be wise to look through the short-term noise and stay anchored to their long term plan.”

Streeted added that Brexit uncertainty is “almost certainly the main reason” the value of UK firms have “stayed depressed” compared to global companies.

She said that the coronavirus vaccine roll out should provide some help. “The head start the UK has made with vaccine roll outs should also help the UK economy get back on its feet more quickly, to withstand the headwinds a no-deal Brexit will bring to business,” Streeter said.

READ MORE: Bank of England says UK banks can withstand COVID-19 and Brexit

On Friday morning, good news from the Bank of England meant any declines were also mitigated briefly.

Britain’s central bank said in its annual financial stability report on Friday that banks remain strong enough to weather the COVID-19 crisis and have done all they can to prepare for Brexit.

But, comments from the BOE governor Andrew bailey at a press conference after the report's publication sent sterling diving. Bailey said there were limits to how much the central bank could do to limit disruption from a no deal Brexit. “The EU has not matched in all respects, in quite a few respects, and that has introduced risks,” Bailey said.

The warning came despite the Bank concluding that the UK banking system was well equipped to cope with a possible no deal Brexit. BOE said earlier this year it was laying the groundwork for the possibility of negative interest rates next year.

Bailey said policy makers had “had no discussion as to whether we would use it” but said the central bank was midway through an “extensive piece of work” to ensure the policy could be used if necessary.

The governor said research suggested negative rates would have an impact on monetary policy transmission, particularly as rates go deeper into negative territory.

The suggestion that the Bank of England’s powers to control the impact of no-deal were limited and the suggestion that negative rates were still on the table spooked investors.

Watch: What is a no-deal Brexit and what are the potential consequences?