Sterling hit a two-year low on Monday as Prime Minister Boris Johnson’s government said it now assumed there would be a no-deal Brexit because a “stubborn” European Union was refusing to renegotiate their divorce.
Many investors say a no-deal Brexit would send shock waves through the world economy, tip Britain’s economy into a recession, roil financial markets and weaken London’s position as the pre-eminent international financial center.
The pound, which was trading at $1.50 on the day of the 2016 referendum, dropped 0.4% to $1.2325 GBP=D3, the lowest level since March 2017.
Johnson’s bet is that the threat of a no-deal Brexit will persuade the EU’s biggest powers – Germany and France – to agree to revise the divorce deal that Theresa May agreed last November but failed three times to push through the British parliament.
The 27 other EU members, though, say publicly and privately that the divorce settlement – including the Irish border backstop – is not up for barter. Many EU diplomats says an election is highly likely.
“There must be some change from the EU and if the EU are not willing to move at all we must be ready to give the country some finality,” Foreign Secretary Dominic Raab said, adding that London was “turbo-charging” no deal preparations.
Raab said the United Kingdom wanted a deal but repeatedly cast the bloc as “stubborn”. Asked if he was threatening the EU – whose $15.9 trillion economy is nearly six times that of the United Kingdom’s – Raab said: “I am not doing any threatening.”
Hedge funds increased their net short sterling positions to the highest level in nearly a year. And in a sign investors are scrambling for protection against currency swings around the time of the Oct. 31 exit, three-month implied volatility surged to a four-month high.
Johnson has told EU leaders he will sit down for Brexit talks when they indicate they are ready to shift on the divorce deal, otherwise Britain will prepare for leaving without a deal, his spokeswoman said on Monday.