Pound LIVE: GBP sterling plunges against euro and dollar after Boris Johnson gamble

The pound at 2pm this afternoon was 1.3079 dollars compared to 1.3115 dollars at the previous close, while rhe euro was 0.8503 pounds compared to 0.8502 pounds at the previous close. Sterling also fell 0.2 per cent on Wednesday as traders assessed the risk of a hard Brexit at the end of the year, with political news expected to take precedence over economic data.

Prime Minister Boris Johnson’s government on Tuesday ruled out an extension to the December 2020 deadline for negotiations on a trade deal with the European Union, creating a new Brexit cliff-edge and cutting short sterling’s post-election rally.

The pound fell on the news and has collapsed more than 3 percent from an 18-month high of $1.3516 struck after Mr Johnson’s landslide victory in Thursday’s general election.

It was last down 0.2 percent versus the dollar, at $1.3105.

Against the euro it was down around 0.2 percent at 85.02 pence.

Thu Lan Nguyen, FX strategist at Commerzbank, said Brexit had come back onto the agenda more quickly than she had expected.

She said: “This is a correction of the election euphoria, slowly but surely, as the realisation sets in that this whole Brexit drama is not over yet and just another deadline of a hard Brexit will be looming eventually at the end of the year.”

Rupert Harrison, a portfolio manager at Blackrock, said Boris Johnson’s plans have impacted the pound greatly. 

He wrote on Twitter: “The simple fact of a majority won’t reduce uncertainty and bring back investment on its own. Needs the government to communicate that it has a long term horizon and has no intention of creating disruption

“There’s no need any more. Stop fighting the last war.

“Having said this, the economic benefits of a reduction in uncertainty will require the govt to, you know, actually help to reduce uncertainty…

“The fall back in the pound over the last 48 hours shows how fragile sentiment is.

“Number 10 need to realise their words have consequences.”

The pound has also fallen by a percentage point against the US dollar to $1.3203, having hit an 18-month peak of $1.3516 just 24 hours after last Thursday’s national vote.

The City had previously been concerned a no deal Brexit would have a catastrophic impact on the UK economy, with the pound falling against major currencies each time crashing out of the EU without an agreement in place has looked likely.

Financial markets and investors have reacted in shock at the lengths the Prime Minister is preparing to go in order to secure a trade deal with the EU within his reduced timeframe.

They have warned the move “sets up another cliff-edge” sending shivers through investors just as they thought there would be a period of stability.

Neil Wilson of Markets.com wrote: “Sterling tripped over its heels as Boris Johnson is looking to legislate for Britain to leave the EU fully in Dec 2020 with or without a trade deal. That means no possible way to extend the transition period.

Deutsche Bank has warned its clients the pound will likely weaken next year as renewed Brexit uncertainty threatens to drag the economy into recession.

The global bank said in a note: “Overnight news that Prime Minister Boris Johnson will seek to amend the EU Withdrawal Bill to prevent an extension of the Brexit transition period beyond the end of 2020 is a material negative.

“While it does not mean a disorderly Brexit is inevitable, it does mean that the optimistic view of a pivot towards a more pragmatic Brexit policy from the government early next year won’t materialise, and this in turn is likely to see growing recession risks for the UK next year.

“We do not believe the market is priced for these, and turn bearish on sterling, targeting 0.90 in EUR/GBP.”

Neil Wilson of Markets.com wrote: “Sterling tripped over its heels as Boris Johnson is looking to legislate for Britain to leave the EU fully in Dec 2020 with or without a trade deal. That means no possible way to extend the transition period.

“I must confess to believing he wouldn’t need to be so drastic, that a large majority offered the flexibility yet strength a Government craves in deal making.

“This sets up another cliff-edge and could create yet more months of uncertainty for investors just when we thought all was squared away.”

Masafumi Yamamoto, chief currency strategist at Mizuho Securities, said: “It seems like the big majority Johnson won is enabling him to take a hard line approach, which the market doesn’t like so much.

“Considering the UK economy looks set to deteriorate as people and companies start to leave the country because of Brexit, sterling’s short-covering rally is over.”

Kit Juckes, foreign exchange analyst at Société Générale, said Mr Johnson’s new hard line on post-Brexit trade talks has caught the markets by surprise.

The financial expert wrote: “The news that UK PM Johnson plans to rule out (legally) any extension to the transition period after the UK leaves the EU has given sterling a kicking this morning.

“Those who thought that a big majority would free the PM to take a patient approach to negotiate the best possible deal, have been caught by surprise. And that’s most UK economists and strategists.

Dean Turner, an economist at UBS Wealth Management, has warned the pound will continue to remain highly volatile over the coming weeks and months.

He said: “The pound’s latest slide is symptomatic of the fact that Brexit is a way off being “done”, and will remain important for sterling over the coming months.

“Despite the Prime Minister’s new-found majority spurring a relief rally, gains were always likely to be capped as investors turned their attention to phase two of the talks.

“The deadline for extending the UK’s transition period beyond the end of next year comes on 1 July.

“The risk of the UK reverting to trading with the EU on WTO terms could still drive larger GBP moves, particularly given the latest noises coming out of Downing Street.

“We expect a trading range between 1.30 and 1.40 until June.”

UK firms more exposed to the domestic economy have also taken a huge hit, with the FTSE 100 slipping 0.2 percent.

The midcap FTSE 250 fared worse and gave up 0.8 percent. The index had hit successive all-time highs in the last two sessions after Mr Johnson’s election victory seemingly cleared a path for Brexit.

Michael Hewson of CMC Markets said: “In essence all of the big gainers of the past few days are giving back some of their gains as the reality check of the possibility of a no deal Brexit, while still over a year away, has tempered some of the enthusiasm from last Thursday’s election result.”

Senior EU figures, including chief Brexit negotiator Michel Barnier, are sceptical that a free trade deal can be agreed within the next 12 months.

A comprehensive trade deal would have to encompass everything from financial services and rules of origins to tariffs, state aid rules and fishing.

The EU is hopeful of beginning trade talks with the UK in March, leaving less than 10 months to strike a deal and get it approved by London and the EU, including member states’ Parliaments.

Cabinet minister Michael Gove attempted to ease fears of a harder Brexit and scepticism over the reduced transition period timeframe, insisting the UK will agree a free trade deal with the EU by the end of 2020.

He told BBC Breakfast this morning: “We are going to leave the European Union on January 31 because of the withdrawal agreement.

“Then the political declaration, which goes alongside the withdrawal agreement, commits both sides to making sure that the follow-up conversations are concluded by the end of 2020.”

Mr Gove also denied the December 2020 deadline would not be met.

He added: “No. We are going to make sure we get this deal done in time.”

Britain’s financial system is now prepared to the the worst-case Brexit scenario with a hard exit from the EU and a consequent trade war, the Bank of England has said.

All of the country’s major banks survived this years’s “stress tests” conducted by the Bank, which aim to look at how the country’s financial sector would cope in the event of a hard Brexit.

The scenario involves a UK recession with GDP plummeting 4.7 percent, with interest rates rising to four percent and the unemployment rate rising to 9.2 percent.

None of the major banks failed them, but Barclays and Lloyds would have had to trigger emergency debt-to-equity conversions, on the basis of new accountancy changes coming in from 2023.

The Bank of England’s financial policy committee said: “The core of the UK financial system, including banks, dealers and insurance companies, was resilient to, and prepared for, the wide range of UK economic and financial shocks that could be associated with a worst-case disorderly Brexit.”