With Britain’s exit from the EU less than 6 months away Theresa May addressed the House of Commons with an assertive tone last Monday afternoon as she looked to quiet fears of a no deal Brexit. The Prime Minister stated that, “Taken together, the shape of a deal across the vast majority of the withdrawal agreement – the terms of our exit – are now clear.” The idea of a Northern Irish Backstop shaped much of May’s address with the consensus very much against any deal that would see a permanent, physical border between Northern Ireland and the rest of the UK should no deal be agreed. Describing the coming weeks as a “time for cool, calm heads to prevail,” it is fair to say that although offering no apparent bad news, May’s speech gave the all too familiar impression that there remains no concrete agreements in place to shape Britain’s exit deal.
The result of the June 2016 referendum saw sterling weaken to its lowest value in 31 years on global currency markets with the biggest one day decline in its history. The pound fell more than 10% from $1.50 to hit $1.33, its lowest level since 1985 and saw a loss of more than 7% against the Euro. The month of June finished with Britain’s currency more than 700 points down on the Euro and over 1,200 points in the red against the USD. Fast forward almost two and a half years we see cable reaching levels as low as $1.19 in January 2017 and the Euro not too far off parity with sterling, hitting a value of €0.93 back in August 2017.
Current levels look somewhat more encouraging with sterling making solid gains against the Euro since August and despite depreciating to a large degree against the dollar since January, the last 3 months have proved more fruitful with the pound up 400 points against the USD. It is fair to say Brexit uncertainty is not the sole cause of a low sterling value, the US Federal Reserve has seemingly been on a never ending cycle of interest rate hikes and US economic figures continue to look strong despite a brewing trade war with China. Yet throughout the last two years Brexit has cast a looming shadow over any concrete forecasts regarding the UK economy. It is obvious that EU representatives have been negotiating from a positon of strength and Theresa May has struggled to be taken seriously since a general election that saw her government majority all but wiped out, save for a fragile agreement with the DUP (Democratic Unionist Party) allowing the Prime Minister to lead a minority government.
The ‘to me, to you’ attitude that has plagued discussions surrounding Britain’s exit from the EU is more a kin to an episode of the chuckle brothers rather than leaders of the some of the world’s most powerful nations sharing ideas and coming up with a meaningful solution. Last week’s Brexit summit in Brussels proved to be equally as ambiguous as previous attempts to put together a concrete exit deal, with the aforementioned Northern Irish Border a significant obstacle. The outcome of the summit has only served to increase pressure on Theresa May, with the patience of her fellow party members being tested even further and confidence in the Prime Ministers leadership on a knife edge. This is coupled with the fact that any fixed agreements made will have to be passed through a UK government filled with mixed opinions and different alliances.
It would be to ignorant to guarantee the same levels of volatility witnessed on the 23rd June 2016 but one thing is for sure the next 6 months will prove to be a testing time for Britain’s currency especially if the continued rhetoric of confidence lacks any substance when it comes to concrete agreements. It is clear that both sides want to avoid a no-deal outcome, after all several EU member states export a vast amount of goods to British customers. With current trade protectionism going against decades of liberalism, now is not the time to be severing relationships. The EU faces a mounting Italian debt issue with a Eurosceptic government coalition seemingly ignorant of warnings to reign in Italy’s budget plans. This is coupled with Europe’s most powerful nation, Germany, seeing a significant political shift towards the centre with Angela Merkel facing what many believe to be her last term in office.
Expected movements could work in both ways for GBP, considering pre-Brexit levels a positive outlook gives sterling much room to grow against its EU and US counter parts and given the state of European and indeed US politics it is fair to say Britain is not the only one set for an uncertain future.
However on the opposite side of the coin we have an unlikely chance, but a chance none the less, of a no-deal Brexit and even more probable is the idea of a leadership challenge against Theresa May and even beyond the 29th March 2019, the likelihood of another general election. Given the depreciation seen on that fateful night for the sterling in 2016, it is fair to say there is equally as much potential for a heavy downward shift to occur. One thing if for sure, whatever course Britain’s currency finds itself set upon, as an investor the likely increase in volatility will present opportunities across various asset classes.
Marcus Brown, ayondo Sales Trader
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