Fears that Britain will leave the European Union without any trade agreement sent the pound to new 5-1/2-month lows on Friday, despite the UK economic recovery and a new trade deal with Japan. Businesses are as worried as ever as Boris Johnson’s government continues to defy calls from the EU to be more flexible and meet its demands. With Johnson’s latest controversial bill, businesses that export and import goods from/to Ireland are in a precarious position.

Theresa May, the former prime minister, asked: “How can the government reassure future international partners that the UK can be trusted to abide by the legal obligations of the agreements it signs?”

Worst week for the pound

Reuters reported that this is the worst week for the pound both against the euro and the dollar since mid-March. The fall was the result of reports that “Brussels has stepped up planning for a ‘no-deal’ Brexit after Prime Minister Boris Johnson’s government refused to revoke an ultimatum on breaking the divorce treaty which Brussels says will sink four years of Brexit talks.”

Klaus Baader, global chief economist at Societe Generale said: “The probability between a deal and no-deal are definitely shifting towards a no deal -- that is very clear. The risk of a no-deal is increasing every day.” Morgan Stanley also said that the risk of Britain exiting on “WTO terms” had risen to 40% compared to 25% earlier.

UK Rejects EU’s Demands, as Brexit Uncertainty Increases

The EU has warned the UK that the controversial elements of the Internal Market Bill are illegal and that it will need to remove them by the end of the month. Tories have also criticised Boris Johnson’s proposed Internal Market Bill, which will be debated on Monday by MPs in the House of Commons.

The new bill puts into question the Northern Ireland protocol, which is part of the Brexit withdrawal agreement approved in January. The protocol ensures that the province will come under the European Union’s single-market rules in order to avoid a hard border in Ireland. However, the new law would give UK ministers the right to change rules regarding the movement of goods if the UK and EU are unable to reach a trade deal. A government spokesman said that the bill will "ensure the government can always deliver on its commitments to the people of Northern Ireland". The bill tries to bypass the formal discussions and bend the rules to deliver Brexit at all costs.

The EU said that these new changes needed to be removed as they jeopardise the UK-EU trade talks. But the government has defied the EU saying that the PM’s proposed bill seeks to protect the “integrity of the UK and the peace process in Northern Ireland.”

On Monday, informal talks between the two sides will resume as differences remain and Brexit appears as uncertain as ever. With the UK government referring to the EU’s lack of realism, one would perhaps question whether discussions will reach any agreement or things would soon diverge even further.

The next official round of talks will begin on 28 September.

Positive News Fails to Lift the Pound

News that the UK has struck its first major “historic” post-Brexit trade deal with Japan has done little to offer substantial support to the pound. The deal will boost trade by about £15bn and International Trade Secretary Liz Truss said that it would bring "new wins" for British businesses in manufacturing, food and drink, and tech industries. However, critics said that the deal will only slightly boost the UK GDP by only 0.07%, which is not comparable to the trades that will be lost by leaving the EU. Britain said that 99% of its exports to Japan would be tariff-free.

But neither this news helped support the pound, neither the fact that the Office for National Statistics reported that UK economic output grew by 6.6% in July as pubs, restaurants and other sectors reopened.

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