The Great Britain Pound (GBP) is on a race to the bottom. It has suffered from Brexit woes and tumbled at the news that the U.K. intends to violate international law on the Brexit treaty.
By all means, this is something that took the market by surprise. With the exception of the EURGBP cross pair, that bounced from the lows a couple of days before the weekend, the GBP started to move lower since Monday. To have an idea about the impact, remember that only last week, the GBPUSD reached close to 1.35 and now trades into the 1.29 area. The same weakness appears on all GBP pairs, reflecting the financial markets’ response to one of the most un-British things in recent history.
What Exactly Happened and Why It is Bad for the GBP?
In the event of a no-deal (suddenly highly likely), the mutually agreed treaty, the so-called Northern Ireland Protocol, will be denounced unilaterally. This undermines the U.K.’s credibility and puts the E.U. in a tough spot moving forward.
It could be very well that this is just part of the negotiations to get Brexit done. But the way to do it spells trouble for the U.K.’s future. Sure enough, it is unlikely that the E.U. will step-away from the negotiations’ table. What is likely is that there is no trust anymore between the two parts and that a precedent is in place.
AS always, financial markets are the first ones to react and to look forward behind the recent developments. The problem is that the U.K.’s decision breaks international law – something you don’t want to mess around with easily unless there is a strong desire to isolate yourself from the world.
But 2020 so far is full of surprises. After Trump’s election in the United States, America’s protectionism policies isolated it from the rest of the world. Next, the coronavirus impact on globalization further pushed it in the same direction. The U.K. risks a similar fate, but it isolates from its biggest trade partner – and neighbor.
Another problem is that the U.K. knows exactly what it is doing. Yes, no one in the United Kingdom denies the break of international law. But if this is a way for a developed country to behave, we should not be surprised that the British Pound collapses, affecting the British households’ savings and investments.