The pound has erased almost all of its gains since the general election exit poll correctly forecasted a resounding victory for the Conservatives, after markets received a “reality check” on Monday about Boris Johnson’s Brexit plans.
The prime minister sent the UK currency tumbling after pledging to enshrine in law his ambition to conclude the Brexit transition period by the end of next year.
That raises the prospect of a new no-deal cliff-edge which commentators have warned will severely weaken the country’s negotiating position and give little time to agree on the future trading relationship with EU member states.
The UK is set to officially leave the EU on 31 January 2020 but while the divorce terms have been finalised, a trade deal has yet to be negotiated. Many firms will be forced to again consider making expensive contingency plans for a possible crash-out on World Trade Organisation terms on New Year’s Day 2021.
Sterling dropped at its fastest pace against the dollar since July to $1.32 on Tuesday morning, just half a cent higher than its level moments before the exit poll. The pound had surged as high as $1.35 when it became clear Mr Johnson’s party was on course for a comfortable majority in the House of Commons.
Some shares that had made strong gains after the election result have also begun falling back.
“The party was good while it lasted,” said Russ Mould, investment director at AJ Bell.
“The impact of this news is that many stocks are giving up some of their earlier post-general election gains, including various banks and housebuilders.
“While this has dampened sentiment towards UK equities it is perhaps a reality check with investors doing well to appreciate that Johnson is going to go to any lengths to get Brexit sorted out without further delay. The message is that UK equities are not guaranteed to stay in the fast lane despite recent gains.”
Elsa Lignos, global head of currency strategy at Royal Bank of Canada, warned that Mr Johnson’s proposed new law would “erode all the positives” of a large Tory majority and bring back uncertainty for the pound.
“If passed, it would mean further pound downside that should be apparent by January,” Ms Lignos wrote in a research note.
Speculation had mounted that Mr Johnson may pursue a softer Brexit now that he has a solid mandate and less need to rely on the support of hard-Brexit supporters on the right of his party.
But those hopes appeared quashed as Mr Johnson put the prospect of a no-deal Brexit firmly back on the table.
The prime minister introduced a legal provision on Monday night to bar him from extending negotiations on a trade deal with Brussels beyond the end of next year.
The move was branded “reckless” by Liberal Democrat interim leader Sir Ed Davey, who warned it risked sending the UK “straight off the no-deal cliff”, threatening jobs, the environment and the NHS.
The ban, to be included in the Withdrawal Agreement Bill tabled in parliament on Friday, will prevent the prime minister from buying extra time if trade talks are not completed within what most experts regard as an extremely tight timescale.
Last week a leaked recording revealed that Michel Barnier, the EU’s chief negotiator, believed the timetable was “unrealistic”. He told MEPs: “We will not get everything done in 11 months.”