While the UK and the EU theoretically have another day or so to agree a trade deal post-Brexit, it’s thought that significant breakthroughs will need to be made before then for this objective to be achieved.
According to the most recent reports, some considerable distance remains between the two parties for the time being, although Boris Johnson and EU Commission President Ursula von der Leyen are likely to remain in close contact in the coming days.
But how would a no-deal impact on the pound and the Euro, and are both markets ready to proceed without an amicable trade agreement?
The Performance of the GBP and the EUR in Recent Times
With a ‘firm’ decision due in the coming days, there’s no doubt that a no-deal exit is now more likely than ever before.
The reason for this is simple; as the key sticking points that remain are largely intangible and have become totemic during the negotiations, with access to fishing waters and the creation of a so-called “level playing field” creating a sense of intransigence on both sides of the divide.
According to the Financial News site, the probability of a deal has now fallen from 64.5% at the beginning of the week to 43.4%, and this has definitely had an impact on both the GBP and the Euro.
Sure, the GBP/EUR currency pairing strengthened in mid-week, but this only followed the now-debunked suggestion that both sides had made key compromises on access to the UK’s fishing waters.
With this in mind, forex traders are well aware that the corresponding value of the pound will sink as a no-deal becomes increasingly likely, while regardless of the outcome, both the GBP and the Euro will trade in increasingly narrow ranges in the months ahead.
If a no-deal does eventually unfold, there’s little doubt that the pound will plunge new depths, while the strength of the Euro will also be tested against a basket of major currencies.
What Will Happen in the Event of a No-Deal?
Aside from the inevitable crash of the respective currencies, it’s hard to argue with the notion that a no-deal Brexit will be devastating from the perspective of trade.
If a deal cannot be agreed by December 31st (or most likely before then), the UK will default to the largely inflexible World Trade Organisation (WTO) terms, which features a long list of tariffs and quotas that they apply to other nations.
Under the so-called “most favored nation status” rule, the UK would also be unable to apply variable tariffs to different trade partners under the guise of WTO, which has been set up to ensure non-discriminatory trade between all partner countries.
Upon leaving the EU, the UK would have to apply consistent tariffs and quotas to goods coming into the country, including those derived from European Union partners.
For their part, the EU would immediately apply the third-country status to the UK, resulting in potentially devastating quotas overall (particularly on agricultural exports such as beef and lamb).
This would result in large taxes and tariffs on goods, which would likely hit the UK hardest overall. After all, the UK has a deficit of £97 billion on trade in goods with the EU, which dwarfs an £18 million surplus on trade in services.
In total, it’s thought that up to 90% of the UK’s goods exports to the EU would be subject to variable tariffs in the event of a no-deal, creating a significant financial burden that will weigh heavily in industry and cause the pound to lose value against the Euro in the near-term.