What will the outcome of Brexit mean for the value of the pound?

Despite concerns that the Brexit deal may be somewhat thin (particularly given its failure to account for services which account for 79% of the UK economy), it has already been ratified in the EU Parliament earlier this week. 

The House of Commons is now also moving to debate and scrutinise the bill in Westminster before December 31st, and despite the relative lack of time available, it’s expected to pass a vote comfortably before being committed into law. 

In this post, we’ll look at how the negotiation process has impacted on the pound to date, while asking what the future holds as we approach 2021?

 

How has the Pound fared prior to the deal? 

In the immediate aftermath of the vote to leave the EU on June 23rd 2016, the pound slumped to its lowest level since 1985

Incredibly, it plunged similar depths a few months later following Theresa May’s hard and uncompromising Mansion House speech, when the government’s red lines appeared to make the prospect of a no-deal increasingly likely. 

This set a trend that has persisted in the subsequent four years, as referenced in forex trading books, as the pound has continued to trade in an ever-depreciating range throughout this time. It has also fluctuated in line with relevant news events, with developments that raised the prospect of a disorderly exit forcing the pound along a downward trajectory. 

As 2020 has progressed and it became clear that the transition period would not be extended beyond December 31st, the pound has sunk further against its major rivals, with the losses becoming increasingly pronounced in the week before Christmas. 

According to Jeffrey Halley, the Senior Market Analyst at Oanda, the value of sterling retreated sharply from 1.3540 prior to the Christmas Eve, after news outlets projected that the negotiations had reached a complete stalemate.  

This impacted sharply on investors too, many of whom had previously laboured under the belief that a no-deal Brexit remained largely unlikely given the potential socio-economic impact in the UK and continental Europe. 

Now and Then – The Future Outlook for the Pound 

In the immediate aftermath of the deal being agreed and ratified in Europe (and ahead of the likeliness of a successful vote in Westminster), the pound enjoyed a significant rise against the Euro. 

In fact, it continued to outperform and supersede expectations, making further gains against the US Dollar as further hold-ups to the roll-out of the billion-dollar stimulus package stateside.  

Overall, sterling rose against all major forex currencies in a market that has largely favoured risk assets such as stocks and commodities during quarter four, while the forthcoming ratification in Westminster will only serve to further drive this trend. 


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However, the long-term outlook of the pound is less clear or favourable, particularly given the relatively “thin” nature of the Brexit deal and its aforementioned failure to make provisions for trade in services. 

As we’ve already said, this accounts for the overwhelming majority of the UK economy, as disruption to the services industry (especially in the financial sector) could weigh heavily on the pound at some point in 2021. 

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