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Rolling the Brexit dice

While Sterling is facing Brexit headwinds, the current uncertainty may offer opportunities when converting currencies. Our analyst, Miles Eakers, analyses possible scenarios and their implications for you.

Rolling the Brexit dice as Britain is set to leave the European Union

In less than 180 days Britain is set to leave the European Union, but how it will do that remains unclear. UK Prime Minister Theresa May’s ‘Chequers plan’ provided no answers to some of the key issues in Britain’s negotiations with Europe, including the Irish border. It also ruffled many feathers within the Tory Party, keeping the UK currency volatile over the past 24 months.

Potential scenarios and key dates

For now, three outcomes are possible.

  1. A no-deal, “hard” Brexit:

In this scenario, the UK will walk away with no trade agreements with the EU, which will hurt the British economy and currency.

On a day-to-day basis, a weaker Sterling means worse foreign-exchange rates and less Dollars or Euros per Pound. At the moment Sterling is hovering around $1.30. However, immediately after the referendum in 2016, it dropped to as low as $1.20.

If you were to convert £1,000,000 at $1.20 rather than at $1.30, you will be $100,000 worse off. That is why it is crucial to put the right foreign-exchange strategy in advance of Britain’s departure.

  1. A deal similar to the Chequers plan:

Widely considered to be a compromise, which is unlikely to satisfy either camps within the Tory Party. However, it seems to be the most favoured by market participants and is sure to provide a much-needed boost to Sterling.

  1. May’s leadership under spotlight:

Many opponents to the UK prime minister, including Labour Party leader Jeremy Corbyn and former foreign secretary Boris Johnson, will challenge May’s leadership in the upcoming general election. A new leader could trigger an extension of article 50 beyond the 29 March 2019 deadline, along with new Brexit negotiations.

What does this mean for Sterling?

The Pound strengthened against the Euro following the Bank of England’s (BoE) decision to raise interest rates in August.

But with the Federal Reserve (Fed) tightening at a faster pace than the BoE, Sterling is likely to soften against the greenback ahead of the crucial November meeting with EU leaders to thrash out a final Brexit divorce bill.

In the short term, this week investors have paid close attention to the Conservative Party’s rhetoric as it convened for its annual conference.

Other key events to watch are the November mid-term election in the US and the Fed’s next interest rate decision in December.

Related Insights:

Two years on since Brexit referendum

Carney says rate hikes likely on no-deal Brexit

 

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