The pound sterling was crushed last week, dropping to a 31 year low against the United States dollar. Unsurprisingly, much of the pessimism appears to have been caused by still lingering concerns over the health of the United Kingdom’s economy and its post Brexit future.
Last week, the pound dropped to $1.2739 dollars. Not since 1985 has the pound sterling sunk so low against the dollar. Later in the week, the pound sterling did post a recovery but still remains low by historical standards.
Part of the renewed fears over Brexit have been stirred up because Theresa May has hinted that access to the common market in the European Union is not a top priority. This could be a big, big deal. Markets have been suffering turbulence primarily due to fears of losing access to the common market.
Many assumed, however, that the UK would aggressively pursue access to the open market. Losing access could be disastrous. Now those investors and companies that anticipated access to the common market must retrench their views and outlook. This will cause turbulence.
Many British companies and firms depend upon access to the market for business and trade. If trade barriers are erected it could become a huge roadblock for British firms. It could also cause multinational companies from the United States, Europe, and elsewhere to divest from the United Kingdom. Companies from the United States and elsewhere outside of Europe may be drawn to the EU itself.
May Taking Tough Stance On EU Demands
So will the UK really leave the common market? Theresa May has said quite bluntly that the United Kingdom will retain sovereignty over its borders (meaning no freedom of movement) and laws. May made it clear that immigration would be under the UK’s sovereign control. She also emphasized that the UK would not be subject to the European Court of Justice.
For the European Union, this will likely be unacceptable, at least when it comes to the common market. The EU has made it clear that freedom of movement and other concessions would be necessary. Given the strong rhetoric and motives for both sides, it seems unlikely that either side will budge. This helps explain why the pound sterling dropped so sharply last week.
Up until now, many had hoped that the UK might be willing to compromise in order to get access to the common market. However, in hindsight this seems overly optimistic. Leaving the EU but granting freedom of movement would essentially null the primary concerns that fueled the Brexit vote.
United States Economic Data Points Up
The United States economy has continued to chug along. As a result, the dollar has been gaining strength, which is putting pressure on the pound sterling. The United States added nearly 156,000 in September. Auto sales also grew and factory orders ticked up. The ISM services index was also up.
Right now, the United States economy is among the stronger economies in the world. For the United Kingdom, this means that downward pressure will be high on the pound sterling. The dropping pound sterling could hurt people who have much of their wealth stored in pounds. However, a weak pound sterling could bolster exports and other areas of economic activity.