Market Overview

Brexit Buyers' Remorse? U.K. Realizing Breaking Up May Be Hard To Do

Brexit Buyers' Remorse? U.K. Realizing Breaking Up May Be Hard To Do

The U.K.'s pound plummeted to a 31-year low early Asian trading Friday, as investors slowly and steadily reacted to the realization that a Brexit will soon become a reality. However, since then, the U.K. currency has recovered most of the lost ground and is trading at $1.2455 a pound, off the day's low of $1.1841.

Despair has set in regarding the implications of a Brexit, which is expected to cripple the U.K. economy at least in the near term, which in turn could hit the euro area and the global economy as well.

A Faux Pas?

However, some market participants refused to attach fundamental significance to the move and shrugged it off as a technical move caused due to temporary large-lot sell orders. Another quarter attributed the move to a fat finger error — a terminology used to refer to a keyboard input error.

Related Link: Pro: Here's How To Profit From The Plunging British Currency

There was also another logic circulating around: Chinese traders began to indiscriminately sell the pound due to the pound weakness amid the quietness on the domestic front owing to the National Foundation Day holidays.

Theresa May's Hard Stance

All said and done, there is unlikely to be smoke without fire. U.K. Prime Minister Theresa May has taken a real hard stance. At the Conservative Party Conference, May said the U.K. would place controls on migration from the EU. Additionally, the U.K. would pull out from the jurisdiction of the European Court of Justice, signaling severance from the single market of Europe.

The Financial Times reported that the U.K. might not push for withdrawing contribution to the EU budget, which was raucously called on by the leave EU campaigners during the referendum earlier this year. The stance is seen by the FT as a bargain for having extensive access to the single market until a free trade agreement is in place.

However, a lack of transitional treat may leave the U.K. high and dry in 2019, with the Europe's second largest economy having to abide by the WTO regulations, which brings into the picture higher tariffs.

Europeans Respond In Kind

In a report, Bloomberg quoted comments by French President François Hollande, who said there has to be a price to pay, as free movement of people, good, services and capital are inseparable. German Chancellor Angela Merkel sent forth a warning that negotiations are never going to be easy even as her U.K. counterpart expressed her desire to have the best possible deal with the EU on trade.

Pitfalls From Clamp Down On Market Access, Immigration

Markets are wary of the serious ramification of a shut out from the single market, which will block manufacturers access to about 450 million consumers of the region. Meanwhile, immigration curbs would make cost of production dearer and access to skilled manpower difficult.

Meanwhile, banks contributing roughly 12 percent of the U.K. GDP may also find the going tough, given their hopes that they can still retain access to the bloc or at least secure an interim deal. There also fears of immigrants facing discrimination in the job market.

As an appeasing comment, Chancellor of the Exchequer Philip Hammond reportedly said in an interview to the Bloomberg Television, "The government is a pro-business government, strongly supportive of open markets, free markets, open economies, free trade." He took pains to explain the U.K. economy could flourish outside of the EU and strongly refuted claims that the U.K. wasn't open for business or foreign talent.

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