Since Boris Johnson took over the reigns of Britain, anticipation and fear among investors has become a norm. As Britain prepares to exit from the European Union without a deal, the consequences surfaced in the form of first recession and now massive drop in the pound.
British pound touched the lowest point in over two years on Monday in international currency markets i.e.below $1.23 against the US dollar and less than €1.10 against the euro. The currency is expected to fall further.
Besides the currency, the market also went down as the British Prime Minister suggested that the odds on ‘No Deal’ are “a million to one”.
As Johnson and his new Cabinet appear to be hell-bent on moving out of the 28-nations bloc without an agreement on October 31, the market and business feel the blues.
Johnson, who is said to have ‘turbo-charged’ the preparations, as of late mentioned there was an “assumption that we can get a new deal” if European leaders are up for it.
Michael Gove, who is the cabinet lead for no-deal, said he and his team is open to talks with Brussels, but wrote in the Sunday Times, “No deal is now a very real prospect.”
Many business lobbies groups have warned the government against the disorderly departure from the EU, as it would cost them huge amounts of money and lead to the withdrawal of the investment flowing into the UK.
Claire Walker, co-executive director of the British Chambers of Commerce said, “The 31 October deadline is fast approaching and businesses are being told to prepare for no-deal, but there are still significant areas where there is simply little basis on which to plan.”
“Business communities want the government to make every effort to avoid no deal, but at the same time, urgently need it to up the ante on its planning to enable firms to prepare for all scenarios.” No-deal implies that now consumer goods will see a price rise and inflation would go up. Ideally, devaluation of a currency is a helpful scenario for a battered economy as it leads to a rise in exports. In this case, it might also provide a boost to UK domestic tourism industry. But it did not appear to be very good news as Britain relies on a large manufacturing sector which runs the economy. The industry and manufacturing sector is dependent on imports from different nations. It would lead to an increase in fiscal debt, reducing the purchasing power of both people and even government.
It is the first time in three years that the country’s decade-old bonds were being sold for a price as low as 0.627%.