Monday November 23, 2020 - 13:50:20 GMT
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Is Brexit Finale Truly the Endgame for Sterling?
If you have traded forex over the last few years, you will be well aware that few major currencies have had as wild a ride as the Pound. From the moment the surprise Brexit vote was announced in June 2016, Sterling has been kicked around by the Euro and Dollar, picked itself back up again, and then been battered all over again. There have been good moments too for Sterling in the last four years, but, more often than not, it has been under pressure. Whatever way you look at it, the Pound was worth about $1.45 and €1.30 in May 2016, and it now sits around $1.30 and €1.11.
However, there is a sense among some traders that Sterling is ready to regain its composure, certainly in the event of a Brexit deal. The market still believes a deal is inevitable, and you only have to look at the chart movements on the day (16th October 2020) that Boris Johnson threatened to walk away from talks to see that in action. Despite Johnson telling business to prepare for no-deal, Sterling rose by the end of the day.
Pound will remain a gamble come what may
But even if there is to be deal in the coming weeks, something that some onlookers believe more likely given Joe Biden’s victory in the US election, will it be the lift that Sterling needs to get out of the four-year funk? The truth is we simply do not now, and you might as well exchange your trading chips for some PayPal payment options for slots in the UK – because sterling will remain a big gamble against the Dollar, Euro and several other currencies. Not only are there headwinds like lockdowns, the spectre of negative interest rates, and mounting national debt. There are also known unknowns, such as the potential chaos at the UK borders – even with a Brexit deal.
The point is this: if you are a forex trader and are reading analysis from the big banks on Sterling’s potential after a deal is secured, then perhaps focus more on the caveats that those forecasts set out; namely, that Sterling strength will be capped. There are various reasons for this, including those headwinds we mentioned above. But traders should also remember that there is the “skeletal” nature of the Brexit deal itself.
When push comes to shove, Boris Johnson’s trade deal with the EU will be much skinnier than anything Theresa May wanted. It’s not a stretch to say that the market will overreact on the day that Michel Barnier, Boris Johnson and the rest of the supporting cast announce that a deal has been secured. After that, there might be a slow realisation that what has been agreed is nowhere near what the UK had before. Remember when every financial commentator worth their salt claimed that a hard Brexit would be devastating for the UK economy? That is now the best-case scenario for the UK.
Brexit could be slow burn damage to UK economy
But we mentioned Sterling as being a gamble, and the reverse is therefore also true. Proponents of Brexit have pointed to the fact that the “Project Fear” proclamations never came to light. There is some truth in this; for example, there hasn’t been the exodus of business or investment once feared. But it is also true that the UK has only left the EU in name only thus far. Greater pain could be coming around the corner as business wakes up to the reality of the UK outside the EU.
In the end, traders should be careful of any agreement that comes – or doesn’t come – out of Brussels or London in the coming days. Forex trading should be done without emotion, and, yet, the market can still be blindsided with political theatre, and nothing does drama for the Pound quite like Brexit. But as far as being an endgame for the Pound’s wild ride, a Brexit deal might just be the start of another roller-coaster couple of years.
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