First it was the suspension of Parliament and the increased chances of a no-deal Brexit that hurt the pound. Now the possibility of a general election has been thrown into the mix, sending the pound to its lowest level in years against the dollar. The combination of a hard Brexit and a market-unfriendly Labour government can also be added to potential downside scenarios for UK markets. Needless to say, economic uncertainty and hard Brexit are two forces that will probably continue to ensure pound weakness…
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First it was the suspension of Parliament and the increased chances of a no-deal Brexit that hurt the pound. Now the possibility of a general election has been thrown into the mix, sending the pound to its lowest level in years against the dollar. The combination of a hard Brexit and a market-unfriendly Labour government can also be added to potential downside scenarios for UK markets. Needless to say, economic uncertainty and hard Brexit are two forces that will probably continue to ensure pound weakness.
Fall-out for Ireland
There are other issues to consider too. The outlook for Ireland suddenly looks less secure. Any UK economic weakness has a direct impact on the Irish economy as one if its largest trading partners. Then there are the political ramifications of any softening of the Irish backstop within the withdrawal agreement with which the Irish government would have to contend.
German Outlook Hit
We should also remember that France exports more to the UK than it does to China, and Germany exports a similar amount to both the UK and China. Germany is already teetering on the edge of a technical recession, and the last thing the Euro-area needs is another hit to growth. This adds to ECB dovishness.
The Operational Tail Risks
The worst of it all is that certain parts of the economy and markets could stop functioning in the event of a no-deal Brexit. Data touches every part of the UK economy and any data flows between the UK and EU would potentially be disrupted. Given the globalized nature of cloud services, even fully domestic UK firms could be affected if their data is held in the EU.
Similarly, the financial sector would no longer enjoy passporting rights across the EU. Fall-back provisions have been put in place to allow certain financial services to continue even if the UK exits without a deal, but these still do not capture all financial flows between the UK and EU.
The Bottom Line
We’re in uncharted territory. This has both UK-wide and broader implications. The pound will likely continue to suffer, but so too will the economic prospects of Ireland and the rest of Europe. We also need to consider tail risk scenarios, whether on UK political outcomes or on data and finance flow disruptions.
