UK Pound Plummets as Hollande Calls for Hard Brexit

In a speech on Friday, October 7, President Hollande warned other EU leaders that the bloc must actively seek to avoid a nationalist contagion and protect the EU's fundamental principles. In order to do this, he argued, the EU must take a tough stance against the UK in Brexit negotiations, to demonstrate to other members that there is a price to pay for abandoning the group.

"There must be a threat, there must be a risk, there must be a price, otherwise we will be in negotiations that will not end well and, inevitably, will have economic and human consequences," President Hollande told a dinner in Paris, attended by the EU commission president, Jean-Claude Junker, and the EU's top Brexit negotiator, Michel Barnier.

"We need to remain strong. If not, we will threaten the very principles of the European Union… That could lead to other countries or regions wanting to leave the EU to gain so-called benefits but without any inconvenience or rules… Britain has decided on a Brexit, I believe even a hard Brexit. Well, we must go all the way with Britain's will to leave the European Union," Mr. Hollande said.

In the immediate aftermath of the historic Brexit vote in June, EU leaders expressed dismay that they would be losing one of the bloc's key members. But more than that, there were jitters that spread across the continent, that other nationalist movements would be embolden by the UK's rejection of the EU, and attempt to follow suit. 

Among those concerned is the socialist government of France. It's leader, President Francis Hollande, is facing an election next Spring, and already, the virulently anti-EU Nationalist Front Party, and its charismatic leader, Marine Le Pen, is gaining in support.

Mr. Hollande's attempt to see off his own threat of anti-EU politics at home almost immediately triggered a response in Asian markets on Friday.

A wave of selling off the pound caused sterling to dive about 10% within a matter of seconds. Sterling did quickly rebounded after some volatility, settling to about a 1.5% drop on Friday morning.

So far, the only official response from the UK government to Hollande's comments came from Mark Garnier, the UK's international trade minister. Speaking in Hong Kong on Friday, he sough to smoothe over the pounds dramatic slip, claiming that pound had "probably been too high anyway."

"Clearly it's [the falling pound] to do with the [Brexit] vote, but actually it's not an unwelcome reaction. Sterling is probably about where it should be. We're just going through a relatively short period of volatility," Mr. Garnier said.

"We've probably found stability at this level. What we don't want is to see it jumping around 5% on a weekly basis — nobody wants their currency to be volatile."

"It would be very easy to turn around and say: 'this is the end of the world.' Actually it's not, it's the opposite, it's a great opportunity for us to do more trade," he added.

The pound has been falling for most of the week, after UK Prime Minister Theresa May finally announced that she intends to start Brexit negotiations by the end of March 2017.

At the Conservative Party conference in Birmingham, she also sough to reassure UK business leaders that she will fight for the UK to maintain access to the EU single market — a lucrative goods and services customs union.

However, the response from Hollande to this, was a swift "non!"

The French president criticized Britain, saying it wants to leave the bloc "but doesn't want to pay."

He warned it is not possible for the UK to retain access to the single market without adhering to the EU's principles of the freedom of movement of people — something Prime Minister May, has said she will not accept.

However, as President Hollande has indicated, Mrs. May is likely to struggle to keep her promises to British businesses and voters.

As the uncertainty over the nature of next year's Brexit negotiations continues, sterling will remain vulnerable to further volatility.