Brexit legal fight to add downside pressure to the pound – MUFG

Sterling continues to weaken this week as market participants move quickly to price in more of a Brexit risk premium. The pound has weakened sharply in recent days resulting in EUR/GBP rising back towards the 0.9100-level and cable towards the 1.3000-level. Potential legal fight adds to Brexit uncertainty, according to Lee Hardman from MUFG Bank.

Key quotes

“The trade-weighted pound has fallen by just over 2.0% from its recent peak. It still leaves plenty of room for further weakness if the risk of a No-Deal Brexit continues to rise considering that there was little risk premium priced into the pound before the recent sell-off.” 

“The latest headlines suggest that the situation is likely to get worse before it gets better. It has been reported that the EU is studying the possibility of legal action against the UK over PM Boris Johnson’s plans to breach the agreement governing Britain’s withdrawal from the bloc.”

“Once the transition period draws to a close at the end of this year, the EU could also trigger the dispute settlement mechanism under the withdrawal agreement which could ultimately result in financial sanctions.” 

“At the very least the UK government’s internal market bill, which it admits would break international law in a ‘specific and limited way’, undermines trust between both sides and makes it even harder to reach a last minute compromise trade deal. Risks to the pound remain heavily skewed to the downside in the near-term.”