Sterling has been tumbling today after a controversial bill that breaches parts of the Brexit Withdrawal Agreement (aka the Brexit divorce agreement) was presented before British parliament.
Essentially, the draft bill attempts to backtrack on the proposed customs border in the Irish Sea (separating Britain and Northern Ireland) which was agreed by Johnson and the EU for Brexit talks to move onto future trade. This has created uproar from the EU who are now threatening to take legal action against the UK unless they remove these proposed amendments.
Many feel the move by Johnson’s team is intended to try and obtain further concessions from the EU in the tense trade negotiations (i.e. either the EU accept these changes or face a messy divorce). The major concern for markets, however, is that it could instead force them to leave the negotiating table altogether. The risk of a no-deal Brexit has therefore been more heavily priced into the Pound which has caused it to weaken considerably. So far the EU are sticking to the planned talks and trying to calculate their next moves but this is an evolving situation and likely to keep volatility high.
As a result, the GBP/EUR has dropped a whopping 2-cents today and trades close to a 5-month low. The GBP/USD is down 1% today and trades around 6-week lows. Sterling had now broken through some big technical levels and, with UK covid case numbers on the rise and an economy that’s still struggling, along with already faltering Brexit talks, it could remain vulnerable in the near term. Brexit talks were expected to heat up over these coming weeks but I’m not sure anyone expected such a major twist at this stage. Is this just an extreme game of brinksmanship or are Boris’s team looking for a no-deal exit?