What now for the Pound?

22 January, 2020

It has been a bumpy start to the year for the Pound with it trading up and down within a tight range against both the Euro and Dollar. Following the surge that we saw in December last year as Boris secured his majority in the House of Commons, it received a boost as many thought that this would pave the way for an easier Brexit. However, this was short lived as quickly he legislated for no further extensions to be allowed. And so, a trade deal must be agreed by the end of 2020 which leaves the door wide open again for a No-deal Brexit. Recent poor GDP and retail sales figures knocked the Pound, however a slight surprise of better than expected employment data on Monday gave it a minor boost, at least in the short-term.

Today we have the much anticipated first meeting between Prime Minister Johnson and European Commissioner President Von Der Leyen, who will begin to set the foundations for the ongoing trade negotiations, and how the future relationship between the UK and the EU will look. It will no doubt be a tense encounter, as now Boris has legislated for no extension, the clock is ticking. Von Der Leyen has herself said that she does not think it possible to hash out a full agreement in the timeframe, and so certain things will have to be prioritized, should any agreement be made. Indeed by allowing no extension this may also put a huge amount of pressure on Boris, the UK and the Pound, as it does give a large amount of bargaining power to the EU – here is the deal, agree or leave without one.

As such we may see the Pound come under further pressure should the EU take a hard stance, as of course it was No deal and the fear of such that pushed the Pound down to the desperate lows we saw last year.

To add to the potential woes for the Pound, analysts are suggesting that due to slowing inflation figures in the UK, we are likely to see a cut to UK interest rates, with Barclays saying this is 71% likely to be as early as next Thursday when the MPC are due to meet. Whilst a lower interest rate does encourage inflation to rise, it is not good for currency rates, as foreign investors receive less of a return and so are less likely to invest in a countries currency.

These two events could spell a tough year ahead for the Pound. Low interest rates combined with a poor or No-deal Brexit could leave it lacking, and quickly we could see rates fall back to some of the low levels we experienced in 2019.

Some readers may like to consider this before the rot begins to set in, given that against the Euro rates are 2.5 cents off the best they have been in around 3.5 years.

Speak to your Broker today for some guidance on how we can help mitigate upcoming risk by tranche trading, forward contracts and limit/stop orders.