financialsense.com / BILL WITHERELL / 10/12/2016
The decline in the British pound sterling that began in June when the UK voted to leave the European Union (EU) accelerated last week, culminating in a “flash crash” on Friday October 7th that wiped out a tenth of sterling’s value, briefly dropping the currency to its lowest level since 1985. While the market subsequently calmed down, sterling eased further on Monday and Tuesday, reaching $1.2122. (This morning sterling recovered to around $1.230 in London following the development given in the news update at the end of this note.)The steep decline in the nation’s currency does not reflect current weakness in the economy, which to the contrary has held up surprisingly well since the Brexit vote. Rather, the apparent cause is the increasing likelihood that the UK’s exit from the EU will be what is termed a “hard” Brexit – that is, a clean break, with Britain leaving both the single market and the EU’s custom union, and ending EU obligations regarding contributions to the EU budget, the free movement of workers, wide-ranging EU regulations in areas such as product standards and labeling, and the jurisdiction of the European Court of Justice.
In an October 2 speech to a Conservative Party conference, Prime Minister Theresa May signaled her intention to take Britain out of Europe’s single market and to become “a fully independent sovereign country.” She announced that she will invoke Article 50 of the EU treaty before the end of the first quarter of 2017, which will initiate a two-stage process of leaving the European Union. The tumbling currency indicates that global market participants consider the UK’s completely leaving the EU to be a less attractive alternative than a “soft” Brexit.