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Sterling drops 3.3% since Election Night

The pound was on track for its biggest two-day fall in nearly two years yesterday as concerns rose that Britain could still crash out of the European Union without a trade deal in place at the end of a transition period in Dec. 2020.

Prime Minister Boris Johnson’s government on Tuesday ruled out an extension to the December 2020 deadline for negotiations on a trade deal with the European Union, creating a new Brexit cliff-edge and cutting short sterling’s post-election rally.

It is now nearly 3.4% below the 18-month high above $1.3516 struck after Johnson’s landslide victory in last Thursday’s general election.

Johnson’s Withdrawal Bill is due to be debated in parliament, where he now has a majority, on Friday. Analysts have put a 80% probability on the chances of the plan to outlaw an extension to the negotiating period passing.

BoE Governor Mark Carney warned on Tuesday that monetary policy tools risk becoming ineffective unless there is better cooperation from governments on trade and fiscal policy.

Money markets are pricing in about a 60% probability of a quarter point interest rate cut by next October, slightly higher than the around 40% just after the election result was announced last Friday.

Recent economic data releases from the UK suggest that the BoE will maintain a cautious stance today despite some grounds for optimism following the election.

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