Fears of a tumultuous departure from the European Union resurfaced last week, causing the volatility in the price of Sterling that has marked every stage of Brexit discussions from the 2016 vote on-wards.
Asset managers have warned that we should expect serious fluctuations in GBP in the coming months as the UK and EU try to hammer out their complex future relationship.
The latest fluctuations, which saw Sterling fall more than one per cent at one per cent to $1.3139 on 7 September, came after the Financial Times revealed that the UK planned to break the commitments it had signed up to nine months ago in the Withdrawal Agreement.
Prime Minister Boris Johnson won the 2019 election on the basis that he had an “oven ready” Brexit deal after he signed up to the Northern Ireland protocol in October 2019, which avoids the need for a hard border on the island of Ireland to comply with the Good Friday Agreement and instead puts a border in the Irish Sea between Great Britain and Northern Ireland. Johnson was warned multiple times about the impact of this decision, something former Prime Minister Theresa May said no British PM could ever sign up to, but he signed the treaty for personal political expediency.
Johnson has now finally understood that the treaty he signed would negatively impact the structure of the United Kingdom, but instead of trying to negotiate in good faith about the future possibilities of the protocol, Johnson and his lead adviser Dominic Cummings have decided to break international law to make the treaty they signed appear more like the agreement they wanted.
Brinkmanship and bluffing are always to be expected in the final months of trade talks, but with the publication of the Internal Market Bill this week, which government ministers accepted would “break international law in a specific and limited way”, Johnson has risked blowing up the entire deal over his own mismanagement and giving pause to any nation that might consider signing a treaty with the UK in the future.
A week after the revelations, sterling now sits at $1.28, the lowest value since July. Whilst the fall in the value of the pound caused concern for many, it was good news for the FTSE 100, where many of the companies are global in focus and earn in dollars rather than GBP. As Sterling fell by one per cent in a day last week, the FTSE rallied by more than double that change (2.69%).
Just as with the collapse of sterling after the Brexit vote in 2016, the weak pound will mean dollar revenues for FTSE 100 companies, once converted back into sterling, are worth more, and with FTSE 100 companies generating over 70 per cent of the revenues outside the UK. To-date, news of a FTSE rally whenever Brexit causes a sterling crash has kept Brexiteers positive about the future, but the question remains open as to whether these companies, many of which are in the financial services or technology sectors, will keep their headquarters in the UK after Brexit.
London is currently one of the world’s great financial centres and home to a wealth of investment banks. These banks manage billions in assets, and perform a variety of financial functions from raising capital and security underwriting to mergers and acquisitions, as explained in this Wall Street Prep guide. Brexit fears and a soft pound may make the FTSE seem attractive today, but the declining GBP is a warning sign and the real threat to the UK markets is the extent to which these huge financial institutions stay in London or move their funds and top people to cities like Frankfurt or Paris after a no deal exit.