Severe blow for the pound sterling

The pound sterling fell by about 10% against the euro from mid-February onwards. That speaks volumes about the forex world’s concerns about the potential failure of Brexit negotiations. However, there are several reasons to remain somewhat optimistic, all things considered.

British and European negotiators finally met this week to discuss a trade agreement. This has come several months later than initially planned, and the pressure to bridge the differences of opinion is greater than ever, considering that the deadline for extending the current transition period expired on 30 June. This comes as no surprise, as British Prime Minister Boris Johnson largely owed his December 2019 election victory to his promise to lead the country out of Europe by the end of 2020. That said, he does not seem to be in any rush for the time being. This week, for example, he announced that expert negotiator David Frost will start working as the National Security Advisor in September. To this end, it is perhaps unsurprising that the pound sterling has been under increasing pressure in recent weeks. Still, there are multiple reasons why the British pound is nonetheless bound to recover.

All talk
Over the past few months, both camps have spoken to each other on a video-conferencing basis. This is, of course, a great way to exchange information and make plans, but it is significantly less suitable for discussing sensitive topics in a calm and nuanced manner. It is generally far better to do so within the corridors of government buildings or in a quiet setting, far from the cameras and journalists. Fortunately, the negotiators will now be given the opportunity to do just this. Last Sunday, Frost and his team boarded the train to Brussels to take their seats at the negotiating table and many more rounds of talks will be organised over the next few months.

Time is money
The primary reason that the likelihood of a no-deal Brexit is less than the drop in the pound is, to put it simply, down to money. Quite a lot of money, in fact. The British government estimates that European fishermen catch upwards of €500 million worth of fish each year in the country’s territorial waters. On the other hand, the damage to London’s business district will be incalculable in the event of a chaotic Brexit. If British banks, insurers and other financial institutions are soon to be excluded from doing business on the mainland, the British Treasury is estimated to lose between €3.5 billion and €5.5 billion per annum, as per the calculations of economist David Miles, who expressed these concerns to the House of Commons earlier this year.

Acting fast
The considerable economic damage caused by the failure to reach an agreement, as well as the hard deadline, are forcing negotiators to make haste. It is of great benefit that the parties will once again be able to sit together around a table, rather than in front of a computer screen. All the factors are in place to make faster progress than before, and accelerate the pace at which price developments are currently estimated on the foreign exchange market. If talks appear, once again, to be falling by the wayside, Johnson and his German counterpart, Angela Merkel, will surely do everything in their power to pull a rabbit out of a hat to avoid a disorderly Brexit.

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the forex world. This column reflects his personal opinion and is not intended as professional investment advice.