Investors see danger in U.K.'s plan for Brexit

Brexit? What Brexit? Business is booming
Brexit? What Brexit? Business is booming

The U.K. plan to leave the European Union is finally taking shape, and markets don't like what they see.

Prime Minister Theresa May on Sunday gave investors a sneak peak at her game plan for Brexit negotiations, suggesting an approach that would make it difficult for Britain to avoid some loss of trade with Europe.

The Conservative leader told party members that negotiations to leave the European Union will be triggered by the end of March 2017, leaving Britain a fully independent, sovereign country.

She took a particularly hard line on immigration.

"We voted to leave the European Union and become a fully independent, sovereign country," May said. "We are not leaving the European Union today to give up control of immigration again."

If Britain does not allow free movement of EU citizens across its borders, European leaders have made clear that the U.K. will not be allowed to remain part of the free trade area.

Investors reacted by sending the pound down to $1.28, near record lows reached in the wake of the EU referendum on June 23. The currency also gave up ground against the euro.

"May seems to lean towards a so called 'hard Brexit,' pointing out that the U.K. would not take back its sovereignty just to 'give it all up again,' " said Holger Schmieding, chief economist at Berenberg Bank.

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The U.K. economy has proved more resilient than expected in the wake of the EU referendum, but a sharp fall in the value of the pound and a big injection of money from the Bank of England have helped limit the fallout.

Losing full access to Europe's markets, the world's largest, could hurt growth. London's financial services sector would be particularly at risk if its banks lost the ability to do business freely across the continent. Automakers are worried about the possibility of tariffs.

Related: 100 days after Brexit vote: No meltdown (yet)

U.K. Treasury chief Philip Hammond acknowledged Monday that the British economy would pay a price for Brexit.

He confirmed that a target to balance the budget by 2020 set by his predecessor would have to be abandoned -- a consequence of Brexit that will add to Britain's £1 trillion-plus debt.

"Self-inflicted dislocations with its major market -- when the U.K. already carries a high level of public debt, a large current account deficit and severe imbalances across major sectors -- are unwise, to put it mildly," Schmieding said.

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