After a burst of optimism last week, it seems that the UK is back to the usual business of uncertainty after a potential extension to the Brexit deadline was discussed. Theresa May was said to be neutral on the issue, but would consider it as an option. The current plan is for the UK to leave the EU in March and there would be a transition period ending in December 2020. An extension could mean the UK is tied to the EU, and would still be paying into the EU, until 2022. May’s appeals to the 27 European leaders to break the deadlock appeared to end in frustration and the Irish border remains a sticking point.
What does an extended transition period mean for the pound?
If the transition period is extended, there are several possible impacts for the pound. It would give businesses more time to prepare, which could be good news for the economy, but it prolongs the uncertainty which may cause further volatility in the value of sterling. The pound dropped after result of the referendum and has struggled to make headway since. This has been good news for exporters because their goods are currently excellent value in Europe and beyond. However, businesses that require imports for goods or parts, or that rely on overseas staff, will struggle to keep up and will not be keen to have this period extended.
Political risks may weight on the pound
The extension is likely to also cause issues at home. Theresa May has successfully fought off a number of leadership challenges to date but many Brexiters may withdraw their support if an extension is agreed. The matter would have to be agreed by parliament and the PM could face a rebellion if she tries to push it through. The prolonged deadline would bring the transition period very close to the date of a general election, which may put the whole issue of whether Brexit goes ahead into question – and that’s if a general election isn’t triggered sooner due to the rifts within the Conservative party and the frustration of the DUP over the question of the Irish border. Political uncertainty often leads to volatility in currencies; the pound has been buffeted by Brexit progress and the drama within parties and parliament. A change of leader, or another snap election, will add more uncertainty to the picture and the pound may fluctuate based on the latest campaign messages and opinion polls.
What next for the pound?
The challenge is that there is so much uncertainty and an extended transition period could be simply kicking the can down the road without providing any new solutions. The EU are looking for new ideas and Theresa May is stuck between a rock and a hard place when it comes to any solution to the question of the Irish border. The EU leaders have stated that insufficient progress had been made to call a special summit next month. That summit had been mooted as the time to draw up a withdrawal deal. This means that Theresa May must come up with a new plan soon or else risk accepting either a ‘no-deal’ scenario – which would cause significant problems with the Irish border - or the extended transition by default. The most likely outlook for the pound is that its fortunes will remain somewhat tied to Brexit, although any good domestic news or signs of stability or growth may prove helpful in otherwise trying times.