Sunday 22 September 2019

Pound falls as EU pushes back on UK Brexit extension bid

Under pressure: British Prime Minister Theresa May. Photo: Reuters
Under pressure: British Prime Minister Theresa May. Photo: Reuters

David Chance

The pound was the worst-performing major currency yesterday, losing ground against both the euro and the dollar after British Prime Minister Theresa May said she would seek only a short extension to talks on leaving the European Union.

The currency started the day trading in a narrow range but then dropped sharply on a media reports that said Brussels would "strongly oppose" extending UK membership of the EU beyond May 23 unless Britain participates in the European Parliament elections that month, a move that financial markets initially interpreted as making a cliff-edge exit with no deal more likely.

Markets will be staying on tenterhooks for some time as Jean-Claude Juncker, the Commission president, said that there would likely not be a decision on the British request until next week.

Hardline Brexiters are unwilling to buy into a long extension of negotiations as they believe the prolonged talks would likely be used to kill Brexit. Mrs May's call for a short extension was seen as an attempt to keep her Conservative party together by political commentators and, possibly to permit another vote on her twice-rejected agreement with the EU on Britain's terms of exit.

A no-deal departure would be the worst possible outcome for businesses here as Ireland is the most exposed of any European Union country to the UK economy.

According to investment bank ING, on average, just 1.9pc of EU output depends on final demand from the UK, but that figure rises dramatically here where it accounts for 7.4pc of GDP.

Given that parliament has already ruled out a no-deal Brexit, some currency strategists believe that the options are narrowing sharply and that the likelihood of a second referendum is growing. "This scenario has been slowly but surely materialising. PM Theresa May has run out of options and I think the EU will push her into calling a second referendum," said Olivier Desbarres of 4X Global Research.

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