The House of Lords put a spanner in the UK government’s Brexit works, with the latest political uncertainty triggering sharp losses in the Pound Sterling.
The GBPUSD fell to new lows of 1.2260 after the news.
“Sentiment is turning increasingly bearish towards the Pound and the terrible combination of soft domestic economic data from the UK coupled with political risk could ensure the currency remains pressured,” said Lukman Otunuga, analyst at FXTM.
Investor fears over the UK’s membership exit from the European Union are made worse by concerns that Scotland will vote to leave the United Kingdom so it can stay in the EU.
Prime Minister Theresa May expects to trigger Article 50 by the end of March, but the House of Lords is sending signals that it could place more obstacles in her way. In spite of the government’s threats to abolish the House of Lords, it has approved a post-Brexit amendment to give EU citizens resident’s rights in the UK. More amendments could be in the works.
The deeply divisive vote to leave the European Union has left the UK’s economy in difficulties. Investors and large businesses are not sure about the short-to-medium term future. The Pound is at its weakest levels in decades, meaning that while goods and services are more competitive when bought in foreign currencies, profits and growth are lower. The situation is unprecedented in modern economics. The UK is leaving the largest trading bloc in the world but will have to renegotiate its trading terms from scratch. Politically, it is trading a future in solidarity with another 26 countries to become a more isolated power, even a wild card on the macro-geopolitical landscape.
Globalisation isn’t a trend that can be reversed, however. For better or worse, modern economies and political systems have to deal with the rest of the world capably. Economically the UK is weaker on its own, at least at this uneasy stage. That is apparent from the GDP performance in the fourth quarter of 2016, which at 0.7 percent was exactly the same as in the same period in 2015, according to official statistics. Employee compensation in the same period dropped from 0.5 percent growth in 2015 to 0.1 percent growth in 2016. GDP prospects for 2017 are gloomier.
The European Union has signaled that it won’t compromise on the four basic freedoms in its single market. These are freedom movement of goods, workers, services and capital. The UK won’t get to cherry pick, as per the frequent messages from the European Parliament and negotiators.
Meanwhile, the Pound is expected to stay weaker the longer the political and economic wrangling goes on. The UK has every sovereign right to decide its own future, but its leaders and people face considerable economic and political consequences.