How Weakness In The British Pound Could Impact S&P 500 Earnings

The British pound traded at a multiyear low Tuesday as the new government led by Prime Minister Boris Johnson appears keen on exiting the European Union with or without a deal on the table.

What Happened

Johnson's government is now "working on the assumption" that Brexit will proceed with no deal struck with its European neighbors, BBC reported.

The country still has time to reach an agreement with European Union officials, but for now the prospect of a no-deal outcome is "very real," according to Michael Gove, the lead planner for a no-deal scenario, according to BBC. 

Johnson has predicted the odds of a favorable deal being struck at "a million to one."

The British pound traded at $1.2168 at the time of publication, marking the lowest levels seen since 2017. 

Impact On US

The spread between the U.S. dollar and the British pound along with other currencies from developed countries is "one of the largest in my career," Larry McDonald, CNBC contributor and editor of the "Bear Traps Report," said in a CNBC interview Tuesday.

This sets up a scenario in which the Federal Reserve needs to establish a dovish stance or the U.S. Treasury may need to intervene, he said.

A soaring U.S. dollar poses the risk of "crushing" S&P 500 earnings, McDonald said, as the U.S. accounts for around $18 trillion of the $80-trillion global GDP.

Coupled with the approximate $17 trillion of dollar-denominated debt worldwide, the rising U.S. dollar could be very damaging, he said.

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