In particular, if the momentum in the negotiations is in the direction of a more severe form of Brexit, this may damage consumer and investor confidence. While the effects might be qualitatively similar in both the UK and the wider EU, it is likely that the impact will be asymmetric, in view of the relative size of the UK and EU economies.
Second, the large movement in the Sterling-euro exchange rate represents an important stabilising mechanism by which the equilibrium real exchange rate depreciation associated with the downward shift in the relative economic prospects for the UK is partly attained through a step adjustment in the currency. It also shifts the financial terms of trade, with UK owners of foreigncurrency assets enjoying a valuation gain.