Brexit risks undermine GBP - AmpGFX

Greg Gibbs, Director at Amplifying Global FX Capital, suggests that at the end of last week, the weak state of European bank balance sheets and Brexit uncertainty came to the foreground to undermine the EUR and GBP. 

Key Quotes 

“Fears over European banks have flared a couple of times this year and have quickly faded.  It may do so again.  The latest catalyst was the opening gambit in a proposed USA Department of Justice fine on Deutsche Bank for its involvement in the pre-2007 mortgage-backed bond fiasco in the USD that was a key factor in triggering the 2008 Global Financial Crisis.  It seems unlikely that this issue will be the one that tips the scales towards a new sense of crisis in European banks.

UK Brexit fears were stoked by an admission (reported by those close to the UK government discussions) that Chancellor of the Exchequer Phillip Hammond was ready to accept that the UK would have to leave the EU single market.  This should not be an enormous shock judging by the many comments since the Brexit vote from EU politicians that the UK will not be allowed to have its cake (limit immigration) and eat it too (access to the single market).

A key fallback position of the UK government is to negotiate a deal with the EU that allows its financial services sector to remain highly integrated with Europe and can continue its role as a center of financial services for Europe and in turn globally; a crucial plank in the UK economy. At issue is the so-called “passporting rights” of financial services companies in the UK to operate freely across the European Economic Area (EEA).  But even this objective is fraught with uncertainty, and other UK sectors would surely suffer for longer and perhaps indefinitely if left out of the single market.

The Brexit uncertainty for the UK may be set to remain a weight on the GBP this week after EU leaders appeared to harden their views on dealing with the UK Brexit, emphasizing a need to force the UK to suffer the consequences of its exit to encourage other member states to pull together and deal with their problems rather than emulate Britain and try its luck outside the EU.

At a summit of EU leaders (the first excluding the UK) in Bratislava, Slovakia last weekend, the Slovak Prime Minister Robert Fico, holder of the rotating EU presidency, is reported by the FT to have said, “Europe will make Brexit “very painful” and ensure Britain is worse off outside the EU, Slovakia’s premier has said, as he dismissed the UK’s confidence about divorce talks as “bluff”. And further, “It will be very difficult for the UK, very difficult,” he said in an interview with the Financial Times, “The EU will take this opportunity to show the public: ‘listen guys, now you will see why it is important to stay in the EU’. This will be the position.”