Market Insider

UK prime minister reminds everyone that Brexit is actually happening and that’s hitting the pound

Brexit could negatively impact UK connectivity: Pro

U.K. Prime Minister Theresa May reminded markets Brexit could be a hard hit on the U.K., and it's in the EU's interest to make sure that's the case, analysts said.

"There's been a lot of wishful thinking about the plans of Brexit and how it might pan out," said Lee Ferridge, head of macro strategy, North America, State Street Global Markets.

"I think the market's waking up to the fact that this isn't going to be a 'soft' Brexit," he said.

The United Kingdom in June 2016 surprised with a vote to leave the European Union, the so-called Brexit. Global stock markets quickly recovered after a two-day sell-off, while the British pound held near a more than 30-year low. Traders then turned their attention to the U.S. presidential election, and some expected Brexit might not involve as significant changes in the U.K.'s economic relationship with the EU as initially forecast.

But on Monday, market concerns about negative spillover from Brexit resurfaced in the pound. May indicated in a weekend interview with Sky News that Brexit would likely mean a full end of the U.K.'s tariff-free access to the single European market.

Sterling dropped more than 1 percent to $1.2125, its lowest since Oct. 28, 2016, when it traded as low as $1.2115.

Pound sterling vs. US dollar 12-month performance

Source: FactSet

"The EU says to the U.K., 'This is not a smorgasbord. If you do not expect the free movement of people you cannot have the free movement of goods,'" said Marc Chandler, global head of currency strategy at Brown Brothers Harriman. He also said that, "the lower sterling goes against the dollar, the lower the euro has to go as well."

The pound also fell more than 1 percent against the euro Monday, while the euro modestly stronger against the greenback, near $1.06.

"The most important thing now is the [U.K.] Supreme Court decision, and that will be out in the next two to three weeks," Chandler said.

Analysts are especially focused on how Brexit unfolds as they monitor populist sentiment in upcoming elections in the Netherlands, France and Germany. French National Front leader Marine Le Pen has long said the country should exit the euro currency.

Italy also remains in focus after the country voted against constitutional reform in December and the financial condition of the nation's banks continues to be a concern.

"In some ways Brexit is a case study for what the effects of the dissolution of the euro might be," said Nicholas Colas, chief market strategist at Convergex.

"It was the first domino to fall back last year, even before Trump won the election and in some ways it is the vanguard," he said. "It was the first vote that showed populism had really" gained ground.

Sterling falls as May warns UK will leave single market

The U.K. has yet to formally begin the two-year negotiation process of leaving the EU by invoking Article 50 of the Treaty of Lisbon, which sets out how a country would exit the union. May had said those talks would begin by the end of March, and reiterated that commitment in the weekend interview.

May also said in the Sky interview that Britain could not hang on to "bits of EU membership."

"We will, outside the European Union, be able to have control of immigration and be able to set our rules for people coming to the U.K. from member states of the European Union," she said.

"The significant thing is that if the U.K. is willing to pursue a hard Brexit despite all this, it might mean other countries would be willing to do the same," said Thierry Albert Wizman, global interest rates and currency strategist at Macquarie.