Sentiment towards GBP has been skewed to the downside once again this week as the market continues to digest the recent “Yellowhammer report”. The report, which is a leaked government document, outlines the potential disaster scenarios that could occur as a result of a no deal Brexit taking place on October 31st. The key details from the report are listed below:
Leaving Date
The first issue noted in the report is that of the leaving ate. The report indicates that the current October 31st (Halloween) leaving date is "not to our advantage”.As the date falls on a Thursday, this means that banks would have to implement changes overnight, instead of being able to do it over a weekend. Additionally, as the next day is the end of the UK half term, many families will be returning from abroad, creating extra traffic at borders.
Food & Water
The document also made grave warnings over the supply of food and water saying that UK consumers will suffer sharp rises in food costs as supplies “decrease”. One of the biggest areas of concern is the potential breakdown in the supply chain of the chemicals which are used to treat water. The report notes that “up to hundreds of thousands” of people could be affected by the disruptions, noting that low income groups will be “disproportionately affected by price rises in food and fuel”.
Channel Ports
Yellowhammer also suggests that major disruption at channel ports could last as long as three months following the Brexit date. The report says that up to 85% of lorries “may not be ready” for French customs. Furthermore, the report states that in a “reasonable worst-case scenario” the disruption could cause delays of up to 2.5 days for heavy goods vehicles which could have a significant impact on perishable goods. France has confirmed that it will apply mandatory EU controls immediately following Brexit.
Energy costs
Furthermore, the Yellowhammer report notes that the people of Northern Ireland face “significant” energy price increases. This is due to a severe “split” in the single electricity market which was put in place following the Good Friday Agreement.
Riots
In terms of security issues, the report also notes the potential for mass protests and the threat of riots as a result of “the shock of a no-deal departure”. According to the report, Police chiefs have spent months preparing plans on how to deal with “a rise in public disorder and community tensions” should a no deal Brexit take place.
Social Care
The Yellowhammer report says that the country’s already “fragile” social care system could be hit hard by increased costs. The report notes that a jump in inflation could see some providers going bankrupt by soon as New Year 2020.
Data
Yellowhammer also notes that personal data collected via the digital economy, which is underpinned by EU regulations on the collection of personal data, could be at risk. The report notes that it “could take years” to re-establish a relationship, noting that the UK could be facing a “data cliff edge”.
Gibraltar
The leaked document highlights that the supply of goods such as foods and medicines to, as well as shipments of waste from, the UK controlled Gibraltar, could be impacted by Spanish customs checks at the border. Around 15,000 workers cross the border between Spain and Gibraltar each day. They could face massive delays of up to four hours for up to a “few months” which could “adversely impact Gibraltar’s economy”.
Medicines
Yellowhammer suggests that the supply of medicines to the UK could be heavily impacted. The report stated that it won't “be practical to stockpile products to cover the expected delays of up to six months”. Additionally, the report shows that it could be more difficult “to prevent and control disease outbreak”.
Fishing
The report also notes that there could be clashes at sea and disruption in ports due to confusion over fishing areas. Yellowhammer suggests that as of day one following Brexit, up to 300 foreign boats could be in UK waters which is “likely to cause anger and frustration in the UK catching sector”
Financial Services
The report notes that “some UK cross-border financial services will be disrupted”. It claimed that banks and other institutions will need to switch to new systems for reporting transactions midweek. Additionally, the risk of a large drop in GBP could also impact main financial services firms.
Petrol Supplies
Yellowhammer outlines that two UK oil refineries might be “inadvertently” put out of government. This is due to government plans to set the majority of import tariffs at 0% following a no-deal Brexit. Such an outcome could result in a loss of around 2000 jobs, raising the risk of protests and strikes which could impact supply in some areas.
Northern Ireland
The report also notes concerns over the border issue with Northern Ireland. It claims that measures to avoid a hard border are likely “unsustainable”. The document says that measures to “avoid an immediate risk of a return to a hard border on the UK side” are “likely to prove unsustainable because of significant economic, legal and biosecurity risks and no effective mitigations to address this will be available”.
Technical Perspective
GBPUSD remains in a very precarious position, sitting at the bottom of the bearish channel which has framed price action since the highs of the year. Price is still above the 1.20 lows for now. However, while below the 1.2382 level, the bias remains bearish and the risk of further losses is high. Below 1.20, the next major structural support is not seen until 1.1415.
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With 10 years of experience as a private trader and professional market analyst under his belt, James has carved out an impressive industry reputation. Able to both dissect and explain the key fundamental developments in the market, he communicates their importance and relevance in a succinct and straight forward manner.