Brexit Bulletin: The Pound Pays the Price

(Bloomberg) -- Today in Brexit: The pound is taking a hit from the U.K.’s political uncertainty, with the latest drop coming at the worst possible time for millions of vacationing Brits.

What’s Happening?

The pound is once again bearing the brunt of heightened Brexit tensions, spelling trouble for leadership candidates and vacationers alike.

The U.K. currency has been in thrall to Brexit developments ever since the referendum campaign kicked off. On Tuesday, sterling fell to the lowest level since 2017 against the dollar as both contenders to be prime minister continued to take a hard line toward the prospect of a no-deal divorce and amid signs talks with the European Union may turn increasingly hostile. The developments boosted concern that a chaotic departure may be in the cards, spooking currency investors who’ve banked on an accord eventually being reached.

Still, yesterday’s drop – while headline grabbing – was just the latest leg down in the currency since it became clear Prime Minister Theresa May was on her way out. The pound is the worst performer among major currencies in the past three months. For leadership hopefuls Boris Johnson and Jeremy Hunt, the risk is that the tumbling currency looks like a vote of no confidence from investors, an inauspicious backdrop for the start of any new premiership.

There are also more immediate consequences, with the slump coming at the worst time for the millions of Brits on the verge of heading abroad for their holiday. The currency is down 4% against the euro, 5% against the dollar and 6% against the Turkish lira since mid-April. Those holidaying in Brazil will find their spending power particularly diminished, thanks to sterling’s 8% drop against the real in the period.

Back in the U.K., a weaker pound also risks stoking inflation, as higher import prices feed through to the consumer. While data today is forecast to show that price gains remained benign in June, that could change if the pound’s decline persists, a development that would worry the Bank of England and eat into the impressive wage gains reported by the ONS on Tuesday.

Today’s Must-Reads

• The European Commission has a new president. Ursula von der Leyen – who has said she would support a further extension of the U.K.’s Brexit deadline – last night won a tight confirmation vote to become the first woman to assume Europe’s most powerful policy-making post. 
• Boris Johnson’s team is considering plans to send members of Parliament home for up to two weeks in October to stop them blocking a no-deal Brexit, Sky News reports.
• Britain’s policy makers are  bracing themselves for an economic shock as the risk of a no-deal departure rises, Jeremy Warner writes in the Telegraph.

Brexit in Brief

Miller Fight | Anti-Brexit campaigner Gina Miller told Bloomberg TV on Tuesday that she’s already begun the process of taking legal action if the future prime minister – most likely Boris Johnson – tries to suspend Parliament to force through a no-deal split. She may not be alone in pursuing such action. Lawyer Jolyon Maugham, who won a landmark ruling that allows the U.K. to reverse Brexit, is also considering a lawsuit.

New Passports | The number of first-time applications for Irish passports from Great Britain has risen more than fivefold since 2015, the Guardian reports.

Early Election? | Boris Johnson wants to hold an early general election while Labour leader Jeremy Corbyn is “still around,” the Times reports, citing unidentified senior allies of Johnson. Bloomberg reported in June that his team was wargaming such a scenario.

Championing a No-Deal? | The acceptance of a possible no-deal Brexit is also spreading to some in the Labour Party. Speaking on the BBC on Tuesday, opposition backbencher Sarah Champion said she would accept that outcome if it was the only way to exit the EU. A HuffPost report later the same day suggested she’s far from the only Labour MP who would make that choice.

In Hindsight | The U.K.'s former ambassador to the EU gave damning evidence yesterday to a parliamentary committee about how the government has conducted the Brexit negotiations. Ivan Rogers said politicians and officials had failed to recognize how the Irish border would become the “core of the problem” and that structurally, the Brexit department was “bound to be a mess.”

Single Mention | Brexit wasn’t high on the agenda during May’s penultimate cabinet meeting on Tuesday. Indeed, according to HuffPost, there was only one tangential reference to leaving the EU during the 90-minute meeting.

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To contact the editor responsible for this story: Anne Pollak at apollak@bloomberg.net, Leila Taha

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