European risk assets sold off today on concerns about the pace of Brexit negotiations and ongoing stalemate between Italy and the EU. Most notable among today’s sell off is the euro, which has weakened to a 16-month low versus the U.S. dollar.
Pound sterling also moved lower on reports that a much anticipated Brexit deal is no longer in the cards for this month. The issue regarding Brexit isn’t so much about the U.K. finding the middle ground with the EU as it does with British negotiators securing a deal that includes a Irish border backstop that it can sell back home.
It’s still possible that a deal could be had, but time is quickly running out for the U.K. ahead of Brexit Day on March 29 where no deal would set into motion economic turmoil and markets are increasingly pricing in this potential outcome.
For the Eurozone, Brexit will certainly be a headwind for the regional economy and markets, add in European Central Bank policy tightening in the midst of what appears to be economic weakening topped with a dash of Italian politics. There’s a lot for European investors to be worried about. In terms of priority of risks, we still think that a failure in Brexit negotiations is most probable risk-negative outcome among the concerns in Europe and likely to produce heightened levels of market volatility.