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Brexit tensions serve as a warning to businesses with FX exposure

David Davis’ resignation as Brexit secretary on Monday (9 July), followed by Boris Johnson leaving his post as foreign secretary, has sent the government and outlook for Brexit into turmoil. This blow to Prime Minister Theresa May’s government has caused volatility in currency markets, with one foreign exchange (FX) expert warning that such political movements bring a significant concern for businesses with currency exposure.

Tensions in the cabinet over May’s Brexit plan, which was agreed on Friday, sparked Davis’ decision to leave his role as Brexit secretary, followed closely by Boris Johnson, who is also disillusioned with the proposals. The Brexit white paper, which will outline the UK’s future relationship with the European Union (EU), is due to be published today.

The latest political headlines have launched the UK into yet another wave of unpredictability, especially with speculation of a leadership challenge. According to Brett Thomas, head of dealing at Swansea-based Godi financial, questions surrounding Mrs May’s future as Prime Minister and the outlook for Brexit both have implications for Sterling’s performance, and therefore businesses with overseas interests. A vote of no confidence in the Prime Minister and a potential leadership contest would spell major uncertainty for the UK government at the worst possible time.

Sterling declined aggressively in FX space in light of Johnson’s resignation, reflecting a view in financial markets that his decision to leave the government signals a “no deal” Brexit is more likely. GBP/EUR traded down to a four month low of 1.1239, whilst GBP/USD wiped out almost all of the gains made since the end of June.

Thomas suggests that provided Mrs May remains seated and unchallenged as Prime Minister, the next crucial phase for the Pound is going to be how the chequers agreement in the form of the white paper is received by the EU. It could prove positive for the Pound if the EU appears happy with the proposals, but should they reject or push the UK for further concessions, expect the Pound to come under pressure.

Brett Thomas, head of dealing at Swansea-based Godi Financial, said:

“We’ve witnessed yet another tumultuous week in British politics and predictably Brexit was once again at the centre of the storm. Whilst the Pound is still trading lower than it was prior to Boris’ exit, there has been a noticeable recovery, as it would appear that markets are prepared to take a wait-and-see approach to how Theresa May rebuilds her cabinet. However, how the EU will react to today’s white paper will impact upon the Pound’s performance and the unpredictability surrounding this could result in significant risks for companies with currency exposure.

“Having a robust FX strategy in place during such turbulent times is crucial to avoid hits to a business’ bottom line. Further turbulence in FX space is likely until we are given any certainty on the Brexit deal. Companies should act now to safeguard against monetary losses in the face of such volatile currency markets.”