Pound slumps 1% as Boris Johnson raises fresh risk of a no-deal Brexit - CNBC

UK Prime Minister Boris Johnson gestures as he speaks to supporters on a visit to meet newly elected Conservative party MP for Sedgefield, Paul Howell at Sedgefield Cricket Club on December 14, 2019 in County Durham, England. F

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The pound fell more than 1% in early trade Tuesday after media reports said that the British government will make it illegal for the post-Brexit transition period to be extended, leaving little time for a trade deal to be agreed with the EU.

Local media reported early Tuesday that Johnson will add a revision to the Brexit bill (formally known as the Withdrawal Agreement Bill) that would explicitly rule out any extension to the transition period beyond December 2020. The U.K. is due to leave the EU by January 31, 2020.

The reports have raised concerns that the U.K.'s new, more empowered government under Prime Minister Boris Johnson could be steering the country towards a harder Brexit.

The legislation, if implemented, would leave only 11 months for a trade deal to be struck with the EU and many people think that is not enough time.

The pound initially fell to a low of $1.3236, down 0.7% from late Monday levels following the report by British broadcaster ITV, and later reported by the BBC and other media outlets.

Early Tuesday morning, the pound was down almost 0.4% against the dollar, at $1.3282 before weakening further to fall below $1.32.

The transition period seen as a time of adjustment for both sides post-Brexit. Crucially, it's a time in which the EU and U.K. can negotiate a trade deal.

During the transition period, EU laws continue to apply in the U.K. as if it's a member state, but the country would no longer be represented in the EU's decision-making bodies. Currently, the transition period has the option of being extended for up to two years if both sides agree.

British media reports say that the Johnson's government will try to make it illegal for the transition period to be extended in a bid to put more more pressure on the EU and to fast-track a trade deal.

Boris Johnson's move comes from an emboldened Conservative Party which won a resounding victory in last week's general election and gained a majority of 80 seats in Parliament. The win was seen as enabling Johnson to pursue his party's own Brexit agenda more easily and Tuesday's news appears to support that.

The U.K. has a vested interest in signing a speedy trade deal. It is keen to strike trade deals with other nations outside the bloc (a large part of the pro-Brexit argument was that leaving the EU would allow the U.K. to trade freely with the rest of the world) and while it can negotiate trade deals during the transition period, these cannot come into force until the transition period ends.

Experts think most countries will want to see what the U.K.'s trading relationship will be like with the EU before they negotiate their own trade deals with Britain, however.

Johnson empowered

Close follower of Brexit proceedings and J.P. Morgan Economist Malcolm Barr said that Johnson's move was a surprise in that it was done without apparent pressure from a group of influential hard Brexit supporters, known as the European Research Group (ERG), from within the Conservative Party.

"As much as we anticipated that the possibility of extending the transition period would be removed from U.K. law, it comes as something of a surprise to us that Johnson appears to have done this entirely voluntarily, rather than as a result of pressure from amendments proposed by the ERG as the legislation came to the (House of) Commons. The signal of intent on his part is, in our view, very clear," he said in a note Tuesday.

Following the latest media reports, Barr said the risk of a "no deal" end to the transition period stood at 25%, "a number we regard as uncomfortably high."

"The negotiation process is path dependent and we could find ourselves on that path even though neither negotiating views it as their first preference," he warned, although J.P. Morgan believes that some form of "deal" has a higher probability of 50%.

"Within the spectrum of probabilities, however, we are changing the numbers so that a simple (Withdrawal) Treaty amendment which changes the end date of the transition has less probability, while some form of "deal" has more. Given the commitment Johnson is now set to enshrine in law, it looks like whatever agreement is reached will be presented as a new deal, even if it takes large parts of the transition conditions and pushes them into 2021."

Crowd-pleaser

The reported move to block any delay to is seen as a way for the government to show voters that backed the Conservative Party (many of whom doing so for the first time having abandoned the opposition Labour Party in droves) that it is determined for the U.K. to leave the EU without further delay.

Since the EU referendum in June 2016, many British voters have become frustrated with multiple instances of political deadlock. The Conservatives were seen to have performed well with much of the electorate in the election due to its mantra that it would "get Brexit done."

The latest government move has drawn criticism from the opposition, with the Labour Party's Shadow Brexit Secretary Kier Starmer saying it represents "reckless and irresponsible behavior we have come to expect from Boris Johnson's Government."

But Conservative Minister Michael Gove said Tuesday that the government was committed to securing a trade deal with the EU by the end of 2020, Reuters reported.

A weaker pound gave a little boost to U.K. equities Tuesday with London's FTSE 100 index trading in positive territory while its continental counterparts traded lower. Maarten Geerdink, head of European equities at NN Investment Partners, told CNBC Tuesday that the latest reports from the U.K. would "produce another cliffhanger for Europe."

"It will be another target that the market can focus on," he told CNBC's Capital Connection. "But I do think the fact that he (Prime Minister Boris Johnson) has such a huge majority in parliament does give him a lot more room to get the deal done." Geerdink cautioned investors that "there is still some time to see how this plays out," however.

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2019-12-17 06:53:00Z
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