Brexit – The Outlook for UK Investors
- Brinksmanship certainly appears to be part of Boris Johnson and Dominic Cummings’ negotiating strategy. Just eight months after
signing the terms of the UK’s withdrawal from the EU, this week saw the prime minister risk breaching international law to renege
on that agreement. Though the true motive for this latest twist in the Brexit saga is debatable, one line of thought is that the UK
government is aiming to increase the stakes to force some last minute concessions from the EU.
Indeed, a similar strategy was deployed in October, resulting in some small compromises from the EU and enabling Johnson to
claim a victory and sign the withdrawal treaty. This week’s events could be part of an attempt to repeat the trick. If so, success
would likely be a continuation of trade arrangements that look broadly similar to current arrrangements.
However, the UK government’s overhaul of an agreement it signed only eight months ago has not been well-received in Europe. It
is possible that it could cause negotiations – which were already strained – to break down completely. This would point to a
“hard” Brexit, with existing trading arrangements between the UK and Europe effectively abandoned. As trade with Europe
accounts for c.12% of the UK’s annual economic output, this would undoubtedly be a significant shock to the system.
While there can be little certainty over how the negotiations will end, it appears to us that recent events have increased the
chances of a hard Brexit. Indeed, this view seems to have shaped moves in currency markets. The sterling-euro exchange rate has
been a reliable barometer of expectations throughout this saga and, at the end of last week, the pound bought as few euros as it
has done at any time since the 2016 referendum.
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