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Pound hits six-week low as UK unveils controversial Brexit bill

Tom Belger
·Finance and policy reporter
·3-min read
(left to right) Prime Minister Boris Johnson and Northern Ireland Secretary of State Brandon Lewis at Hillsborough Castle during the Prime Minister's visit to Belfast.
Prime Minister Boris Johnson and Northern Ireland Secretary of State Brandon Lewis at Hillsborough Castle during the Prime Minister's visit to Belfast. Photo: PA

The pound hit a six-week low against the dollar (GBPUSD=X) on Wednesday, as the UK government prepares to unveil a controversial trade bill and fears grow of a no-deal Brexit.

The bill, to be published later on Wednesday, will see trade powers previously held by Brussels transferred to the UK and devolved governments.

But the plans will override commitments over Northern Ireland made by the government in the withdrawal agreement it previously negotiated with the European Union. Minister Brandon Lewis sparked uproar late on Tuesday by admitting the plans would breach international law.

Sterling was trading 0.2% lower against the greenback at just below $1.30 in early trading, and also shed 0.2% against the euro (GBPEUR=X) at around $1.10.

Chart: Yahoo Finance
Chart: Yahoo Finance

A volatility index for the pound also reached its highest level in five months.

In currency markets, Neil Wilson, chief market analyst at Markets.com, said “sterling is finding the going very tough, sinking to a 6-week low with the dollar catching a bid and Brexit risks weighing.”

For cable—the British pound and US dollar trade—“this has meant the build-up of downside pressure has blown out the stops at $1.30 and GBP-USD is running south with not a lot of support until $1.28,” he added.

“Brexit risks are a major factor – the UK government admitted it will break international law in order to fix the withdrawal agreement should there be no deal by 15 October. Talks continue today between the UK and the EU and there are clear headline risks as traders see a higher chance of no deal emerging.

“However, we should caution that a deal will likely emerge at the last moment after considerable brinkmanship from both sides that makes it seem as though a deal is impossible. Nevertheless, with still five weeks to go before the deadline imposed by the British government, there may be a very rough ride ahead for the pound.”

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The pound’s decline has lifted many “heavyweight dollar-earners” on Britain’s FTSE 100 (^FTSE), Wilson noted, with BP (BP.L), Shell (RDSB.L), Unilever (ULVR.L) and British American Tobacco (BATS.L) among the biggest risers.

The currency has tumbled significantly since the start of September, when it was trading at $1.34. It had largely held its value in recent months despite time running out for Britain to strike a new EU trade agreement before the end of the transition period at the end of the year.

But the lack of progress and tough rhetoric from both sides over recent negotiations has knocked confidence in a deal being reached.

The sell-off had accelerated on Tuesday as the head of the UK government’s legal department quit his post, with the biggest daily fall versus the dollar since March.

A government spokesperson declined to comment further, but the Financial Times reported that the departure was in protest at the decision to renege on the EU withdrawal agreement.

Prime minister Boris Johnson plans to tell the EU that the Withdrawal Agreement he negotiated and signed is “contradictory” and needs rewriting, according to the Daily Telegraph.

Jordan Rochester, a global FX strategy analyst at Nomura, said the chances of no deal being reached now stood at 40%.

He said no-deal could become investors' "base case" if the legislation allowed Britain to unilaterally overrule the withdrawal agreement "in areas it fancies." The EU could even signal it will walk away from negotiations, he added, and it would "take a lot" to bring them back if Britain sticks to the bill.