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Brexit Woes Weigh On The British Pound

UK

The pound sterling concluded Wednesday trading in negative territory, dropping for the 11th consecutive day against the U.S. dollar. That marked the longest losing streak by the currency since the 2008 financial crisis as the unraveling of a perfect storm pulls it down.

For Britons heading for the holidays, unfortunatety things are not expected to get much better any time soon. Here’s why:

No Deal-Brexit Weighing

The pound enjoyed a bright start to the year, touching a 2-year high of $1.4372 in April. But everything has gone south from there, with Wednesday’s low of $1.2669 marking a nearly 12 percent slump.

GBP/USD Year-to-Date Change

(Click to enlarge)

Source: Business Insider

There is a confluence of factors that have been eating up the GBP. By far the most grievous is the uncertainty sorrounding whether Britain will be able to strike a deal with other EU members before the Brexit deadline finally comes calling on March 29, 2019.

UK officials met in Brussels on August 16th to discuss future borders between the Republic of Ireland and Northern Ireland with EU officials. The issue of how to prevent a ‘hard border’ on the Irish Island remains one of the most contentious issues in the UK-EU talks as they try to strike an agreement how the UK will leave the bloc. Related: Beer Giants Are Striking Out With Millennials

Interestingly, neither UK's newly-appointed Brexit minister, Dominic Raab, nor the EU's main Brexit man Michel Barnier will attend the talks; rather, lower-ranking civil servants will be in-charge of proceedings even as a growing number of politicians continues sounding the alarm about the possibility of a 'no-deal scenario'.

The general prognosis is not good.

Barnier's deputy, Sabine Weyand, has warned EU companies in a tweet to "prepare for a disorderly Brexit".

(Click to enlarge)

Britain's new foreign minister, Jeremy Hunt, recently warned that the risk of a no-deal Brexit has lately been increasing. He has also predicted that the pound will fall sharply in the event that no agreement is reached.

Latvia’s foreign minister, Edgars Rinkevics, is not any more sanguine than his British counterparts. On Wednesday, he said there was a 50-percent chance that the two sides will not be able to reach an agreement before the deadline, which in effect would mean the UK exiting the EU in a completely unpredictable manner.

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Meanwhile, Irish senator, Neale Richmond, has warned about the possible consequences of a no-deal outcome:

"Flights would be grounded, crops will rot in the ground, there will be a run on the banks, trucks will be stuck at ports and a hard border would be a target for dissident paramilitaries," he warned.

Turmoil in Emerging Markets

Other than the no-deal snafu, increasing turmoil in emerging markets has not been helping the pound either. EM currencies have been on a downward trajectory over the past few days, spurred by the massive hammering of the Turkish lira which has lost a quarter of its value in the space of just a week.

The lira has been on the receiving end of a one-two punch, and growing trade/diplomatic tensions, between Washington and Ankara, with its Waterloo coming after president Trump slapped hefty fines on Turkish imports into the U.S. President Erdogan returned the favor by announcing triple-digit tariffs on American spirits, cars and tobacco.

Turkey has just expressed its willingness to talk with the U.S. to find a solution to the impasse though it it’s anyone’s guess as to whether Washington will accept the olive leaf.

By Alex Kimani for Safehaven.com

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