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The pound slumped on Tuesday on the back of comments made by Boris Johnson, the favourite to become Britain’s next prime minister, in the final Conservative Party leadership debate.
Mr Johnson ratcheted up support for a no-deal Brexit, binning the so-called Northern Irish backstop plan agreed under the UK’s current withdrawal terms with the European Union.
“I’m not attracted to time limits or unilateral escape hatches or all these elaborate devices, glosses, codicils and so on that you could apply to the backstop,” Mr Johnson said on Monday evening during the debate.
His rival Jeremy Hunt also rejected the backstop outright, an insurance policy that ensures no hard border is introduced between Northern Ireland and the Republic of Ireland hugely unpopular with large parts of the ruling Conservative Party.
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Mr Hunt said “the backstop, as it is, is dead...I don’t think tweaking it with a time limit will do the trick, we’ve got to find a new way.”
That both candidates of the UK’s leadership contest publicly back Britain to crash out of the EU sent warning signals to the markets on Tuesday.
The pound on Tuesday afternoon, London time, was $1.2418, compared with $1.2521 at the previous close. Worries about a no-deal Brexit made the pound hit a two-year low of $1.2439 at the beginning of July.
Meanwhile, the pound-to-euro exchange rate is testing a key support level at 1.11 euros to the pound at the close of Tuesday.
The pound-to-euro exchange rate has been on a dismal run, with sterling slipping to a tenth consecutive weekly loss against the European currency at the close of the last trading week.
Sterling has not been this low since the beginning of the year, with a 1.176 peak in May.
Political uncertainty has certainly not eased tensions in the markets, and members of Mr Johnson’s own party have voiced concerns that the former foreign secretary is becoming “radicalised” on the issue of a no-deal Brexit.
Dominic Grieve MP, a staunch critic of the Conservative Party’s lurch towards hardline, Brexit-supporting factions, said that “when challenged and confronted [Mr Johnson] radicalised even further and excluded any possibility of trying to negotiate some way out of the backstop ... the consequences of that makes the choices starker and starker”.
Business magnate and Virgin boss Richard Branson warned last Thursday that the pound could “collapse to parity [one for one] with the dollar if there is a hard Brexit”.
Meanwhile, the EU is preparing for “brutal” talks with Britain’s next prime minister after Brexit secretary Stephen Barclay held a bad-tempered meeting with the bloc’s lead negotiator, Michel Barnier.
A senior EU diplomat said that Mr Barclay told Mr Barnier that the agreement was dead “not once but five times”.
“If this is what is coming, then we will be heading for a no deal very quickly.”
Another diplomatic source close to the EU’s negotiating team described the meeting as the most hostile conversation between the two parties in the three years since Britain voted to leave the EU.
“It worked like a megaphone but it has hardened attitudes,” the diplomat said.
“It is not the smart thing to do if a new prime minister is serious about getting a withdrawal agreement across the line.”