Brexit: New Prime Minister Takes Over as the British Pound Sinks to Fresh Lows


Garo Mavyan | Retail FX & Precious Metals Trader

After continued attempts and unending failures to secure Brexit, the embattled Theresa May has finally relinquished her post as Prime Minister to make way for a successor, Boris Johnson. Johnson, who became Prime Minister in late July, must now continue negotiations with the European Union to deliver Brexit before the impending October deadline this year. However, he is seen as a controversial figure, and is one of the most ardent Eurosceptics in British politics. Last year, he proudly resigned from May's government in protest to her handling of the negotiations. It therefore comes as no surprise that during his short reign, he has renewed tensions with EU leadership in Brussels and has sent the markets spiraling closer towards a state of total panic.

Essentially, Prime Minister Johnson has argued that the current withdrawal agreement negotiated by his predecessor must be replaced. He is particularly against the Irish Backstop—intended to prevent a hard border between Northern Ireland and the Republic of Ireland—and has insisted that EU leadership must renegotiate and provide more compromises. EU leadership has remained united in its position that the current agreement is not up for renegotiation. In response, Johnson has recently stated that Brexit will happen by the October deadline even without an agreement, which would undoubtedly be catastrophic for the British economy. Following Johnson's cantankerous statement, the British Pound has suffered a substantial weakening; increasing pressure from the very real prospect of a hard Brexit has driven it down to a two-year low against major currencies like the US Dollar, Euro and Canadian Dollar. In just two days this month, the Pound has dropped by approximately 2.4%. If Johnson and the EU find themselves locked in a stalemate leading up to October, this slide in the Pound could be sustained and continue to worsen. In a scenario where Johnson's government leads the UK out of the EU without an agreement, not only would the British economy experience an abrupt contraction, but such a staggering weakness in the Pound would dramatically increase the costs of imports and lower household spending. Lower business confidence could also lead to less direct investment by domestic and foreign entities. In short, the approach that Prime Minister Johnson has adopted will most likely prove disastrous.

As Theresa May happily contemplates where to take her extended vacation, the world is nervously contemplating if Boris Johnson can deliver Brexit with a suitable withdrawal agreement. So far, it's not looking too promising.

Essentially, Prime Minister Johnson has argued that the current withdrawal agreement negotiated by his predecessor must be replaced. He is particularly against the Irish Backstop—intended to prevent a hard border between Northern Ireland and the Republic of Ireland—and has insisted that EU leadership must renegotiate and provide more compromises. EU leadership has remained united in its position that the current agreement is not up for renegotiation. In response, Johnson has recently stated that Brexit will happen by the October deadline even without an agreement, which would undoubtedly be catastrophic for the British economy. Following Johnson's cantankerous statement, the British Pound has suffered a substantial weakening; increasing pressure from the very real prospect of a hard Brexit has driven it down to a two-year low against major currencies like the US Dollar, Euro and Canadian Dollar. In just two days this month, the Pound has dropped by approximately 2.4%. If Johnson and the EU find themselves locked in a stalemate leading up to October, this slide in the Pound could be sustained and continue to worsen. In a scenario where Johnson's government leads the UK out of the EU without an agreement, not only would the British economy experience an abrupt contraction, but such a staggering weakness in the Pound would dramatically increase the costs of imports and lower household spending. Lower business confidence could also lead to less direct investment by domestic and foreign entities. In short, the approach that Prime Minister Johnson has adopted will most likely prove disastrous.

As Theresa May happily contemplates where to take her extended vacation, the world is nervously contemplating if Boris Johnson can deliver Brexit with a suitable withdrawal agreement. So far, it's not looking too promising.

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