Pound tumbles after hard Brexit fears resurface

Britain’s pound tumbled , erasing its post-election gains, after news that Prime Minister Boris Johnson planned to take a hard line in Brexit talks with the European Union dashed hopes of an end to Brexit uncertainty.

In his boldest move since winning a large majority in last Thursday’s election, Johnson will use the prospect of a Brexit cliff-edge at the end of 2020 to demand the EU give him a comprehensive free trade deal in less than 11 months.

The reaction in markets, which had hoped that a resounding election win for Johnson’s Conservative Party would end near-term Brexit uncertainty, was swift.

We have been warning against getting too optimistic on the pound in the run-up to the UK election and now that the contest is over we are turning negative on sterling again.

After Britain leaves the EU on Jan. 31, it enters a transition period in which it remains an EU member in all but name while both sides try to strike an agreement on their post-Brexit relationship.

Currency analysts say that markets did not appear to be pricing in increased chances of a hard Brexit, but the post-election Brexit optimism was over.

Some investors had thought that Johnson would use his majority in Parliament to adopt a more moderate approach towards Brexit negotiations.

Analysts say a comprehensive trade deal with the EU could take years, not months, to negotiate.

They added that for sterling, the economy’s prospects could play a greater role – starting with Thursday’s Bank of England policy meeting.

British factory output fell at the fastest pace in more than 10 years during the three months leading up to Johnson’s election victory, a survey on Tuesday showed, underscoring the economic challenge he faces.

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