How Will a Hard Brexit Affect the Financial Markets?

The world’s financial markets are affected by many things, from adverse weather to political machinations, so it should come as no surprise to hear that when news broke of failed negotiations between Theresa May and Jean-Claude Juncker, the markets reacted with dismay.

Before the DUP rejected Mrs May’s proposals that Northern Ireland remains in the EU Customs Union post-Brexit, the pound rallied against the Euro, hitting a high of €1.141. When news broke of Arlene Foster’s eleventh-hour telephone call to Theresa May rejecting proposals for Northern Ireland to stay in the EU Customs Union, GBP/EUR fell to €1.132.

GBP is Under Pressure

A continued failure to reach a critical trade agreement is putting the pound under increasing pressure and the market is increasingly bearish as traders get the jitters. This will come as no surprise to market analysts, who predicted months of volatility following the EU referendum.

When the British people voted “leave”, the financial markets reacted with horror. The pound sank to a 31-year low and £2 trillion was wiped off share prices overnight as investors pulled £5 billion from stock market funds. Some traders described it as “Black Friday”.

Economic Ups and Downs 2016/17

Of course, it’s not all been bad news. Once the reality of Brexit sank in, the markets rallied, and the pound partially recovered. The British economy grew stronger towards the end of 2016, buoyed up by increased consumer spending, but rising prices have put the squeeze on households in 2017 and economic growth has slowed right down.

Brexit Uncertainty Continues

If Brexit uncertainty continues – which is likely – analysts on forex trading platforms expect the pound to stay weak against other major currencies. The markets are becoming increasingly frustrated by Mrs May’s lack of clarity, which is being perceived as weakness. This is backed up by the fact that GBP soared by almost 3% after Mrs May made a pledge in January that parliament would be given a vote on all Brexit deals.  Traders welcomed signs of greater clarity, but sadly, the period of calm didn’t last long.

Are we heading for a hard Brexit? It seems likely. Time is rapidly running out for Theresa May to secure a trade deal with the EU. She recently told the Commons that there will be no transitional deal unless a trade agreement is reached. If Mrs May pursues a hard Brexit, we can expect further weakness in the pound in a bearish market.

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