The pound has sunk in early trading today ahead of a Boris Johnson speech in which the Prime Minister is expected to demand a looser trade deal with the EU that could spell a hard Brexit.
Sterling fell 0.73 per cent against the dollar to $1.3103 by 9.30am ahead of the Prime Minister’s speech. Johnson is set to start UK-EU trade deal negotiations today with the aim of securing a Canada-style free trade deal.
Read more: Nissan plans to increase UK market share in Brexit contingency plan
Read more: Brexit: Boris Johnson set to reject regulatory alignment in EU trade negotiations
But if the parties fail to secure a deal by the end of 2020, Johnson is set to say the UK will effectively fall back on World Trade Organization terms in a hard Brexit.
While a Canada-style deal would enable tariff-free and quote-free trade on goods, a WTO-style deal would buck City expectations of tighter alignment with the EU.
Instead, the model would look similar to Australia’s own arrangements, defaulting on WTO terms with the potential for sector-specific side-deals. That includes the potential for significant new tariffs and other barriers to trade.
“It would appear that the currency has taken a look at what comes next Brexit-wise – i.e. the long, arduous, and, you know, pretty damn important trade negotiations between the UK and EU – and had a bit of a wobble,” Spreadex financial analyst Connor Campbell said.
Sign up to City A.M.’s Midday Update newsletter, delivered to your inbox every lunchtime
“Its fears aren’t unfounded. They are based on the details of a speech Boris Johnson is set to deliver to businesspeople and ambassadors, one stating that the UK will refuse close alignment with EU rules and reject the jurisdiction of European courts.”
Read more: Boris Johnson’s Brexit Day speech in full
London Capital Group’s head of research, Jasper Lawler, added: “If the main purpose of Boris Johnson’s speech is to get across the idea that the UK does not plan to align with EU rules, the pound could come under renewed pressure.
“Foreign secretary Dominic Raab offered some hints that might be the case over the weekend when he said in an interview: ‘We are taking back control of our laws, so we are not going to have high alignment with the EU, legislative alignment with their rules’.”
Read more: FTSE 100 opens higher despite market chaos in China
The future of financial services is set to be a hot topic in the UK-EU trade deal talks. UK firms’ access to European markets will be key, amid other issues like fishing rights.
Johnson has underlined his determination to walk away from EU trade talks if the sides cannot reach a deal and pursue a hard Brexit instead.
But he said negotiations over the Canada-style model and Australia-style model did not represent a choice between “deal or no deal”. Instead he said: “In either case, I have no doubt that Britain will prosper.”
