Sterling exchange rates remain incredibly changeable at present as we find ourselves in the week of Brexit. Brexit remains the largest topic for the value of the pound, and as views swing on what a deal will look like and how likely it is a deal will materialise, sterling’s value is changing violently. For example, over the weekend after an unscheduled meeting between Brexit Secretary Dominic Raab and EU’s chief negotiator Michel Barnier ended with no deal on Sunday, sterling’s value fell by a cent.
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Currently a Brexit deal now looks unlikely with some suggesting the timelines have been pushed back to the end of the year. PM May admitted ‘weeks’ may be needed to break the deadlock with Brussels. The topic of disagreement remains the Irish border.
In real terms this recent uncertainty could well be a short-term thing and a solution could be found just as quickly as the doubt sets in this week. From a timeline perspective we have an EU Summit starting today and ending on Friday, which was the original event to agree a Brexit deal by. The UK Budget is now in less than 2 weeks’ time, Monday the 29th October, and there is now talk of a emergency Brexit summit with no dates set for November.
Personally, I see a deal being done over the next 60 days as the most likely outcome, with political agreements being made to force through a vote in Westminster. Saying that however, there is a risk of a vote of no confidence, which could force a General Election. If Labour was to come into power they have suggested a second Brexit referendum and if the original timelines of coming to an agreement with Brussels are missed, a no deal could be the result. (Remembering this is the deal on the break up, not on the trade between the UK and the EU thereafter, which will be impacting rates for the coming 12 months!)
These new trade terms in the worst case could significantly hinder the pound's value, but I see this period as the perfect breeding environment for quick political alliances and deals to be made by the PM. Remembering that the PM formed a Government by finding a further £1 billion for the Irish budget almost overnight.
From a sterling forecast perspective, if and when a deal is done I expect sterling to climb well as a relief rally in sentiment would be likely. In the near term I expect more political positioning and uncertainty to push sterling down, and if any worst-case scenarios play out sterling could be significantly lower by the end of the year. This means that all clients with a sterling position should be considering all options and making a risk-based decision on how to manage their own exposure.
Outside of the political world economic data continues to be released. UK Unemployment figures were released yesterday showing a surprising improvement with wage growth climbing at its fastest pace in 10 years pushing up the pound's value.
Today, focus is on the Retail sector and Consumer figures, again both are expected to show yet another contraction which is likely to push the value of the pound down. We also end the week with an important speech by Mark Carney, the head of the Bank of England which also has the potential to move markets.
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