The pound against the US dollar (GBPUSD=X) dropped by over 0.7% on Tuesday morning after prime minister Boris Johnson made a major move to guarantee Britain will be dragged out of the European Union by 2021.
The pound held up over the key $1.31 mark, trading around $1.32, but has been steadily sliding since Friday when Johnson’s Conservative party secured an emphatic win at the general election.
The transition period is set to conclude in December 2020.
It can be extended for up to two years, if both the UK and EU members agree. If that was to happen again, Brexit could be delayed. However, Johnson’s government is aiming to add a new clause to the Brexit bill to make it illegal for parliament to just that.
This week, the House of Commons is set to vote on the amended Withdrawal Agreement Bill — known as the Brexit bill — which will determine if an extension will be ruled out.
Last week, the Conservatives won 365 seats. This is far above the 326 seats needed in parliament to form a government. With this comfortable majority Johnson can push through a Brexit deal and start reshaping trade and relations in the way he wants, without worrying too much about getting support from external politicians.
The reason why markets and critics are subdued is because this could enhance the chance of the UK leaving the EU without a trade deal.
If the bill is passed on Friday, the government will then have just until the end of the transition period on 31 December to negotiate a free trade agreement with the bloc. Trade deals take a notoriously long time — several years. However, if the UK doesn’t seal a deal by the end of the transition period, then the UK-EU trade relationship will default to World Trade Organization (WTO) terms.