The “No-Deal” Brexit Scenario and What It Means for the Currency Markets?

A “no-deal” Brexit simply means that the United Kingdom (UK) will have to leave the European Union (EU) without any formal withdrawal agreement. This formal agreement essentially sets out the rules of ‘disengagement,’ and would form the basis of the new trade relationship between the UK and the EU during the transition period between March 29, 2019 (official date for Brexit) and December 2020, or possibly December 2022. Additional talks will take place during this transition period to establish a permanent set of rules for trade between the two entities.

“Most analysts agree that a no-deal Brexit will have an adverse effect on the British Pound”

However, in a no-deal Brexit scenario, this formal agreement will not be signed, and these talks will not take place. All current trading and regulatory links between the UK and the EU will end immediately on March 29, 2019 without any substitute. In this situation, the trade relationship between the UK and the EU henceforth would be governed by existing rules established by the World Trade Organization (WTO), as if the UK was never a member of the European Union. A no-deal Brexit is generally perceived as the worst possible outcome, as the separation will be disorderly & chaotic and carries with it considerable risk of the UK being shunned by the EU in favour of other EU member countries, such as Ireland.

Related: What is Brexit?

Most analysts agree that a no-deal Brexit will have an adverse effect on the British Pound (GBP). The UK currently trades with the EU under the auspices of the EU Customs Union, which is a free trade agreement, and under the single market, which allows for the free movement of goods and services, capital and people between member states. A no-deal Brexit will put an immediate stop to this arrangement. Analysts predict that the GBP will take an immediate hit because UK goods will become more expensive and, consequently, the number of exports will decrease, thereby reducing the demand for the GBP.

At the time of writing, UK Prime Minister Theresa May has just survived a vote of no confidence among her own party colleagues, and is facing an uphill battle in trying to get her Brexit agreement passed in Parliament. It will take a tremendous amount of effort on her part to re-draft the withdrawal agreement with the permission of her European counterparts, and to then get it passed by the UK parliament. Prime Minister Theresa May will have to accomplish all of this before the deadline of March 29, 2019 to prevent a “no-deal” Brexit.

Jin Yau

 

Account Manager – Tradeview
jyau@tvmarkets.com