The Pound fell sharply today following a report which showed the financial and growth implications of a No-deal and soft Brexit outcomes. The report published by the National Institute of Economic and Social Research highlighted the financial implications of both scenarios. The report which was released in a timely fashion with Halloween just around the corner provided a ghoulish shock to Sterling with the currency falling against many of the majors.
The report from the NIESR, known as one of the widely reputed financial forecasters have predicted that the difference between a soft Brexit and a no deal outcome would equate to £15bn to the UK economy. The report which followed the conservatives pledge to put an end to austerity which would seem a mathematical impossibility unless a deal with the EU is obtained.
In their ‘ending austerity’ pledge the Chancellor and Theresa May’s ambitious plan to boost NHS spending by £20 BN would seem at best a challenge with the reports grave forecast. The report highlighted that a No-deal outcome would erase scope for the Tory Party to increase spending and would trigger a rise in public borrowing. In terms of growth, the report depicted growth being stagnant for 2 years.
Other NIESR predictions included heavy inflation attributed to further weakness in Pound Sterling. The news condemning the GBP/EUR currency pair to near-month lows.
A Bloomberg report from ‘unnamed’ sources has highlighted further issue in the Tory party. The source confirmed that the party are unable to agree on how to move forward with Brexit talks. Last week May faced Conservative MP’s at 1922 committee where it would report that she won back support for her Chequers Deal. It would however appear that these reports weren’t as accurate as initially described by the media.
The 1922 committee consist of a group of Backbench MP’s who meet in the house of commons and discuss party matters. With an estimated 44 Tory MP’s believed to be voting against her Brexit plans many believed that a negative outcome at the 1922 committee could have signalled a leadership challenge.
Her survival of this meeting has potentially signalled she will remain PM however if her plans continue to receive further public criticism her leadership could be challenged.
One of the most significant contributors to GB Pound weakness was the Conservative party signalling that preparation for no-deal Brexit will begin on the second week of November. Its understood that civil servants will begin creating new British laws, and legislations so that UK EU citizens and businesses can prepare for the outcome.
As of November, Whitehall will focus on over 100 technical details on how a no deal Brexit outcome could affect certain industries. If the UK were to crash out of the EU, a scenario that becomes more likely as the deadline looms. Uncertainty would surround the legal, regulatory and trading status of companies and citizens living in the 27-member states as well as Britons abroad. The Treasury and HMRC recently confirmed funding to the tune of £8m to help customs staff train staff and prepare for a no-deal outcome.
The GBP/EUR currency pair opened this week’s trading at 1.3151 and sterling strength against the single currency has seemingly declined with every Brexit related report. The GBP/EUR currency pairs week low was seen on just a few hours before the close of markets, touching 1.1246.
Whilst the majority of the GBP weakness has been self-inflicted the GBP/EUR currency pair was dealt a major blow when Mario Draghi stuck to his QE plan and insisted Euro inflation would improve. His comments provoking the pair to fall from 1.1301 to 1.1259. The pound was able to recover slightly before the no-deal plans were publicised on Friday condemning the currency pair to the three-week low of 1.1246.
Key events to keep an eye out for this week will include the chancellor’s budget. If he takes a bullish stance and splashes the cash investors may believe that a Brexit deal could be found. The report discussed above suggests he needs a positive Brexit outcome to ‘end austerity’ and his budget could indicate as to where the truth lies.
The Bank of England will also play a prominent party in the Pound recover or demise. The BOE published their inflation report and forecasts. Whilst they may be reserved on commenting because of continual Brexit uncertainty high inflation number could put further pressure on the bank to raise rates or at least comment on future guidance.
Finally, expect more sound bites from Tory Remainers and Brexiteers. Hopefully, more clarity will be found on the UK’s direction which could, in turn, see a mild rebound for the GBP/EUR currency pair.