How will a no-deal Brexit affect Sterling?
02 September 2019

With the 31 October deadline looming for Brexit, the possibility of the UK exiting the EU without a deal is looking increasingly likely. With Boris Johnson seemingly determined to press ahead with a no-deal scenario in the absence of an agreement, the new PM is on a collision course with many MPs from all parties.

With such political turbulence coming in the weeks ahead, there’s an undeniable effect on the value of sterling. But what will a no-deal Brexit do to sterling once the UK has left the EU? Here’s what we’re expecting to see in the run-up to a hard Brexit and beyond.

Post-referendum: the Story So Far

A no-deal has always been theoretically possible, but the arrival of hard Brexiteer Boris Johnson to Downing Street has suddenly made the prospect very real. This is bad news for sterling, which has responded poorly overall since the referendum in 2016. Despite a few mini-revivals, overall the trend has been downwards, leaving sterling around 15% lower against the Euro than pre-referendum.

The ongoing uncertainty is contributing to the performance of the pound, and the market perception is that the Government doesn’t have a clear plan for Brexit. This, combined with warnings about the potential impact of a no-deal Brexit, has led to a market in a distinctly skittish mood.

Another factor to consider is the number of short positions being held. Until these positions start to be closed, and demand to buy sterling begins to rise, there’s further potential for the pound to fall. Investors buying sterling increases the value in response to rising demand.

Any Reason for Optimism?

At the moment, the absence of a clear way forward makes it difficult to predict with any certainty how far sterling could tumble. Presently, however, the sterling currency exchange rates are being disproportionately affected by political events.

While it’s true that the political climate always plays a role in pricing sterling, at the moment the market is only responding to the position on Brexit and disregarding most other data. At some point, this situation will return to a more normal state of affairs, with a fuller suite of information determining the currency price.

Whether this is good news for sterling depends on what the data shows. During the second quarter of 2019, GDP fell by 0.2% – the first economic contraction in more than six years. A recession is generally defined by an economy shrinking in two successive quarters, so when the data for the third quarter is available, the prospects for sterling will be much clearer.

If the data is stronger and shows an economy that’s bounced back, this could help fuel a sustained rise in the value of sterling, offsetting some of the negativity around Brexit. If there’s a further period of stockpiling by manufacturers, it could bolster flagging figures. During the first quarter of 2019, the trend for stockpiling ahead of Brexit helped GDP growth significantly. Should manufacturers choose to do the same ahead of the October deadline, the country may avoid slipping into a recession.

On the other hand, should GDP show a further contraction, the fate for sterling could be sealed. A UK in recession coupled with a no-deal Brexit will undoubtedly send the pound plunging deeper than the 10-year low it hit in August 2019.

While much is uncertain, it’s difficult to be optimistic when considering all the key indicators. A weakening economy across the main sectors – with slowing growth even in strong areas such as Services – coupled with Brexit uncertainty, a 10-year low in the pound, and ongoing forecasts for shortages mean that sterling is likely to continue to endure a torrid time.

Expect Volatility

The one thing that is certain about sterling is that exchange rates are liable to experience a lot of volatility. As Brexit edges closer and the EU and Britain decide how they’re going to proceed, the price of sterling is expected to fluctuate.

Anyone considering a currency exchange in the coming months could find they get far less for their pound that they anticipated, and the volatility make may it even harder to plan ahead. For this reason, it’s a good idea to evaluate the measures you can take to protect your money, such as reserving a forward exchange rate.

To find out more, get in touch with Privalgo today to discuss the best options available, whatever direction the Brexit negotiations take.

How will a no-deal Brexit affect Sterling?
02 September 2019

With the 31 October deadline looming for Brexit, the possibility of the UK exiting the EU without a deal is looking increasingly likely. With Boris Johnson seemingly determined to press ahead with a no-deal scenario in the absence of an agreement, the new PM is on a collision course with many MPs from all parties.

With such political turbulence coming in the weeks ahead, there’s an undeniable effect on the value of sterling. But what will a no-deal Brexit do to sterling once the UK has left the EU? Here’s what we’re expecting to see in the run-up to a hard Brexit and beyond.

Post-referendum: the Story So Far

A no-deal has always been theoretically possible, but the arrival of hard Brexiteer Boris Johnson to Downing Street has suddenly made the prospect very real. This is bad news for sterling, which has responded poorly overall since the referendum in 2016. Despite a few mini-revivals, overall the trend has been downwards, leaving sterling around 15% lower against the Euro than pre-referendum.

The ongoing uncertainty is contributing to the performance of the pound, and the market perception is that the Government doesn’t have a clear plan for Brexit. This, combined with warnings about the potential impact of a no-deal Brexit, has led to a market in a distinctly skittish mood.

Another factor to consider is the number of short positions being held. Until these positions start to be closed, and demand to buy sterling begins to rise, there’s further potential for the pound to fall. Investors buying sterling increases the value in response to rising demand.

Any Reason for Optimism?

At the moment, the absence of a clear way forward makes it difficult to predict with any certainty how far sterling could tumble. Presently, however, the sterling currency exchange rates are being disproportionately affected by political events.

While it’s true that the political climate always plays a role in pricing sterling, at the moment the market is only responding to the position on Brexit and disregarding most other data. At some point, this situation will return to a more normal state of affairs, with a fuller suite of information determining the currency price.

Whether this is good news for sterling depends on what the data shows. During the second quarter of 2019, GDP fell by 0.2% – the first economic contraction in more than six years. A recession is generally defined by an economy shrinking in two successive quarters, so when the data for the third quarter is available, the prospects for sterling will be much clearer.

If the data is stronger and shows an economy that’s bounced back, this could help fuel a sustained rise in the value of sterling, offsetting some of the negativity around Brexit. If there’s a further period of stockpiling by manufacturers, it could bolster flagging figures. During the first quarter of 2019, the trend for stockpiling ahead of Brexit helped GDP growth significantly. Should manufacturers choose to do the same ahead of the October deadline, the country may avoid slipping into a recession.

On the other hand, should GDP show a further contraction, the fate for sterling could be sealed. A UK in recession coupled with a no-deal Brexit will undoubtedly send the pound plunging deeper than the 10-year low it hit in August 2019.

While much is uncertain, it’s difficult to be optimistic when considering all the key indicators. A weakening economy across the main sectors – with slowing growth even in strong areas such as Services – coupled with Brexit uncertainty, a 10-year low in the pound, and ongoing forecasts for shortages mean that sterling is likely to continue to endure a torrid time.

Expect Volatility

The one thing that is certain about sterling is that exchange rates are liable to experience a lot of volatility. As Brexit edges closer and the EU and Britain decide how they’re going to proceed, the price of sterling is expected to fluctuate.

Anyone considering a currency exchange in the coming months could find they get far less for their pound that they anticipated, and the volatility make may it even harder to plan ahead. For this reason, it’s a good idea to evaluate the measures you can take to protect your money, such as reserving a forward exchange rate.

To find out more, get in touch with Privalgo today to discuss the best options available, whatever direction the Brexit negotiations take.

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