Brexit Developments and the Impact on the Queen’s Currency

The House of Commons moved swiftly to pass Prime Minister Johnson’s Brexit bill with a majority of 124. Now, the UK is theoretically on track to leave the European Union by January 31, 2020. Britain’s decision to leave the EU by the end of the month marks a significant milestone for the country and the region. From a financial perspective, savers are enjoying a degree of short-term relief. Over the long-term, it is less certain how a Brexit will impact the economy.

From a financial security perspective, Britons can rest assured that it is unlikely for any domestic political interference to derail the pathway to Brexit any longer. Labour under Jeremy Corbyn has effectively been silenced with the election mandate entrusted to the Tories. This bodes well for the GBP which tends to rally when there is clear consensus on policy. MPs voted in favour of the withdrawal agreement bill (WAB), and the next step requires the European Parliament (EP) to ratify this agreement. If all goes according to plan, the Brexit will become effective on January 31, 2020.

The Pathway to a Negotiated Brexit Settlement is Only Beginning

Article 50 of the Lisbon Treaty will be revoked and the UK will pass the point of no return and be excluded as a member of the European Union. Between January 31, 2020 and December 31, 2020, the UK economy will enter into a transitionary period with the European Union. During this 11-month period both sides will be working feverishly to hammer out an agreement. It’s important to point out that the United Kingdom will remain in the single market and in the customs union. However, the UK will not be represented in the EP, nor will it be represented in the EU Council of Ministers.

By February 25, 2020, EU member states will present their negotiating mandate to the EU chief negotiator, Mr. M. Barnier. Many hot topic items will be addressed, including Northern Ireland, et al. No extension will be possible after July 1, 2020. Four broad sets of regulation will need to be passed in Britain including trade, the environment, agriculture, and the freedom of movement. So, while January 31, 2020 is being hailed as Brexit day, nothing substantial will take place until December 31, 2020 at which time there will be greater clarity regarding a free-trade deal, or the implementation of a new trading relationship.

Economic Ramifications of Brexiteering

Source: EUR GBP Plus500

The short-term impact of a Tory victory on December 12, 2019 helped the GBP to rally substantially. This pyrrhic victory for the Queen’s currency greatly benefited short-term traders, particularly with currency pairs like USD to GBP, JPY to GBP, and EUR to GBP. As is evident from the above chart, the GBP strengthened markedly against the EUR in Q4 2019. All the polls indicated strong support for Tories, which boosted the GBP (and weakened EUR) in the run-up to the election. Now that the pathway to Brexit is clearer in Parliament, the UK can focus all of its energy on a negotiated settlement with its European counterparts. Naturally, the GBP rallied in response to the electorate’s strong endorsement of a Brexit and the Tories.

Source: EUR/GBP Data

Several intervals are worth pointing out with the EUR/GBP currency pair:

January 7, 2020 – 0.8492
December 9, 2019 – 0.8417
November 7, 2019 – 0.8623

While these currency exchange rates indicate a tight trading range for the EUR/GBP, there are some significant outliers in the mix. For example, when news of the UK general election results broke on December 12, the next day the EUR/GBP pair was trading at 0.8345 – down 1.30%. While unsubstantial in the broader scheme of things, currency traders were able to generate substantial returns on this slight depreciation of the EUR and appreciation of the GBP. By purchasing CFD forex contracts on the EUR/GBP, traders focused on geopolitical events to profit off currency movements. Another substantial change took place on December 31, 2019 when the EUR/GBP pair was trading at 0.8450, down 1.04% from December 30, 2019 at 0.8539. The New Year represents a clear pathway to Brexit, despite the lengthy deliberations that the process entails.

The degree to which the GBP will strengthen or weaken is dependent upon a host of factors, including the complexity of the pathway to Brexit. Employment, inflation, and other macroeconomic variables have a part to play in the process, although speculators will pounce upon the Brexit process for their buy and sell cues. GBP stability is backed by the BoE (Bank of England) and currency traders will carefully be eyeing Mark Carney’s actions and comments vis-à-vis monetary policy for further clues on trading decisions.

11 thoughts on “Brexit Developments and the Impact on the Queen’s Currency”

  1. “Sponsored Content” refers to the clearly commercially-oriented article links that occur after the actual NBF article. However, this article was clearly not written by Brian, but it’s not clear who did.

  2. It won’t be stopped, but in as much as it was originally negotiated by a government that didn’t want Brexit, and if forced to have Brexit meant to have one that resulted in as little independence as possible, it *might* be renegotiated.

    But not in a way remainers would like!

  3. That is an important point, BUT : It wasn’t wanted by the government but they were fed up of their own backbench dissenters, so to shut them up the referendum was held which the government expected to win. It lost, Boris expelled prominent remainers to the outer darkness, and now those dissenters form the government. It is not going to now be renegotiated or stopped.

  4. ‘ Sponsored content ‘. Sponsored by who ? ‘ All the polls indicated strong support for Tories ‘ . 52% of votes cast were for parties that either opposed Brexit, or promised a second referendum before any deal was implemented.

  5. Brexit is either slightly or extremely harmful to the UK economic outlook, cutting long term GDP growth by 5% to 12% (i.e. -1% to -2% p.a.) according to the UK government’s own estimates.

    That currency chart above is hilarious. Try this one to get a better perspective on how GBP is really performing:

    So, GBP has lots of headroom to grow, especially if Brexit were suddenly cancelled, or became “Brexit in Name Only” with full alignment with the Single Market, as effectively the currency collapsed in 2016 as traders priced in the economic cost of Brexit and has barely made up ground since. However, as those scenarios are extremely unlikely, the most likely outcome for the UK is low growth in GDP (around 1%-1.5% lower than the European average), and poor performance of GBP, as the UK has another Japan-style “lost decade”.

    Put it this way, the Conservative politicians that also run funds (Redwood, Rees-Mogg etc) have advised their clients not to invest in the UK.

    If these pro-Brexit government insiders won’t put any of theirs or their clients’ money in it, clearly only a fool would consider doing so.

  6. I think it’s important to keep in mind that Brexit arrangements made by the prior government, which neither wanted nor intended Brexit, may be subject to renegotiation or outright repudiation.

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