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07.07.202010:29 Mutually beneficial Brexit can give new impulse to the pound

Long-term review

Exchange Rates 07.07.2020 analysis

Recently, the debate over the possible subsidence of the British currency has not subsided. Experts fear that the pound may collapse under the weight of negative factors, and this collapse will undermine the British economy.

According to analysts, the pound has lost its attractiveness to investors at the moment. The situation is not saved even by the impressive plan of stimulating the national economy in the amount of 5 billion pounds, proposed last week by Boris Johnson, the British Prime Minister. Economists consider these measures not very effective, since this amount of stimulation is about 0.2% of the country's GDP. At the same time, during the crisis caused by the COVID-19 pandemic, the volume of GDP declined by at least 25% from the previous level. According to analysts, the current plan proposed by the British government will not help the national economy get out of the crisis "hole."

The way out of this situation may be additional cash injections that can support the pound temporarily. These include providing an additional 5 billion pounds (or 0.2% of GDP), which will need to be poured into the British economy. This option of improving the economy is ready to be offered by Rishi Sunak, British Finance Minister. It is expected that on Wednesday, July 8, he will provide a detailed cost plan to the British government.

However, despite the measures taken, experts are sure that the current growth of the British currency will be restrained in any case. The main obstacle to strengthening the pound remains the gloomy prospects of trade negotiations with the European Union. The shadow of uncertainty looming over the British economy due to Brexit still persists. Adding to the uncertainty is the fact that the transition period for the UK's exit from the EU will end on December 31, 2020, while there is no progress in the Brexit negotiations.

It can be recalled that last Thursday, July 2, the next round of negotiations between the UK and the European Union took place, which predictably turned out to be pointless. According to experts, a serious disagreement between the parties prevented a compromise.

According to some analysts, mutually beneficial Brexit could give a new impulse to the British economy and the British currency. For the pound, the country's exit from the EU in a soft version, with a deal, could become the springboard for the next rise.

Turning to history, in particular towards the end of the 20th century, one can notice that previously, the pound was a symbol of the independence of Great Britain. For the first time, Margaret Thatcher, who served as prime minister at that time, announced this role of the pound. Largely thanks to her, the indicated currency was elevated to the rank of the most important pillar of the state. However, maintaining this status was a heavy burden on the British authorities, since there was a constant threat of devaluation of the GBP for decades. The sovereignty of the pound, which is revered by Brexit supporters, is just an illusion. According to experts, you should not hold on to the past, because past achievements are ghostly and raise a number of questions. This will not help the British currency, but on the contrary, it can slow its growth.

Analysts say that the determining factor for the British currency will be the way the country leaves the Euroblock. At the same time, the character of Brexit is particularly important, that is, withdrawal from the EU with or without a deal. It is possible that the pound will continue to decline after the end of the transition period amid a general economic downturn. A trade agreement with the EU could trigger a temporary pound rise in the short-term. According to the calculations of Standard Chartered analysts, UK exiting from the Euroblock without a deal will bring the pound to a critical level of 1.1000. In a milder version, that is, in the case of an orderly "divorce" from the EU, the pound will have much easier. Standard Chartered believes that it will rise to 1.4000. According to experts, it is Brexit that will give direction to the dynamics of the pound in the long run.

Exchange Rates 07.07.2020 analysis

However, regardless of the conclusion or refusal of a trade transaction, Brexit will not resolve key issues regarding further trade relations with the EU. In such a situation, the probability of an economic downturn and an increase in the current account deficit increases. If this scenario is realized, a pound increase in the medium and long-term is unlikely.

At the moment, the British economy is actively struggling with the severe consequences of COVID-19, mostly with mixed success. The period of quarantine and isolation measures imposed by the British authorities provoked a sharp decline in consumer activity against the background of the pandemic. This caused a significant blow to the dynamics of the British currency, which is now trying to restore its position.

According to the IHS Markit/CIPS study, the Purchasing Managers Index (PMI) for the UK services sector reached 47.1 points last month. This is much higher than the May value of 29 points, but below the figure of 50 points, indicating the resumption of business activity. In turn, negative factors for British consumers hindering the further development of economic activity are the instability of the national economy, large-scale job cuts, the constant threat of layoffs and the high likelihood of a second wave of coronavirus.

As a result, there are too many obstacles to the growth of the pound. Adding to these barriers is a chaotic Brexit hanging like a sword of Damocles over the British economy. Analysts recommend selling the pound, considering current purchases unprofitable. This decision is supported by the significant volatility of the GBP/USD pair. On Tuesday morning, July 7, the pair started with high marks such as 1.2488–1.2489, but then entered a downward trend. Later, the GBP/USD pair was trading in the range of 1.2476 - 1.2477, trying to stay at this level. These attempts were made with varying success.

According to experts, the pound will remain under the pressure of fundamental factors in the near future, the main of which is the risk of a "hard" Brexit, a further slowdown of the British economy and the strengthening of the negative consequences of the post-pandemic crisis.

Uitgevoerd door Larisa Kolesnikova,
Analytische expert
InstaForex Group © 2007-2020
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