How will Brexit impact the pound?

In News by redsocks

The pound’s fate has been tied to Brexit since the result of the referendum, with sterling hit by political uncertainty.

Dissatisfaction with Theresa May’s proposed Brexit deal has come to a head, with the PM suffering historic parliamentary defeats over two iterations of the deal. Now, as she prepares to face an unyielding Brussels, the pound continues to weather uncertainty and volatility, particularly with the financial specter of ‘no deal’ looming ever closer.

No deal Brexit.

The UK was scheduled to depart the EU on March 29, 2019, but this deadline has been extended to April 12 at least. In the initial plan, there was a proposed transition period lasting until the end of December 2020, during which the finer details of Britain’s future relationship with the EU were to be ironed out. It may be that this period is extended along with the initial deadline, but currently, the picture is as unclear as ever.

Here, we look at the prospects for the pound as we approach Brexit, along with steps those making currency transfers can take to protect themselves from negative exchange-rate movements.

How will Brexit impact the pound?

Although sterling started 2018 as one of the top-performing currencies, ongoing Brexit turbulence has seen it yo-yo over the last year. Now as March comes to an end, MPs remain divided on the future of Britain’s departure from the EU, while increasing drama in parliament has added to the uncertain and caused a measure of volatility in the pound.

UK GDP growth in 2018.

According to the latest data from the Office for National Statistics (ONS), UK gross domestic product (GDP) grew by 0.6% between June and September, up from 0.4% in the three months to June. However, there was zero growth in September. Business investment fell by 1.2% in the third quarter, suggesting that concerns over Brexit may be causing businesses to delay investment decisions.

The final three months of 2018 demonstrated a reversal in the direction of the British economy as the growth rate declined quarter-on-quarter to 0.2%. Overall, the GDP for 2018 fell to its lowest since 2012 at 1.4%, down by 0.4% compared to 2017.

In the midst of division and debate in parliament, the chancellor’s Spring Statement went largely unnoticed. The headlines included a review of government borrowing – £3bn less than expected – and a downgraded forecast that GDP will expand by 1.2% this year. Phillip Hammond reiterated that his plans and forecasts were Brexit-dependent, which is perhaps why the statement had little impact on the pound.

Back to the drawing board.

Parliament has some big decisions to make. In March, the pound rose to fresh highs on hopes there would be an end to the Brexit paralysis, but the bill was voted down and lost by 149 votes. The pound rose on the news that MPs rejected the ‘no deal’ scenario with a majority of 43.

However, the optimism was short-lived, and sterling fell back the next morning as the market acknowledged the vote was not legally binding. Speaker John Bercow added a further wrinkle by preventing an unchanged Withdrawal Agreement from being presented to parliament a third time.

Currently, sterling remains unpredictable thanks to a continually shifting state of play. If you need to send money overseas during this time, speak to your international-payment provider about how you can best manage your payments.

What impacts currency movements?

No one can predict exactly what will happen to sterling as we approach Brexit, and it’s important to remember there are other factors that affect its value.

These include inflation or the cost of living, which held steady at 2.4% in October (measured by the Consumer Price Index). When inflation falls, this eases the pressure on the Bank of England to raise interest rates. When interest rates are low, this can deter foreign investors from pumping money into the UK as it will earn less interest. This can also reduce the pound’s relative value.

Could the pound increase in value?

Although sterling is weak at the moment, the more clarity there is over any Brexit deal, the more likely it is that the pound will rise in the near future. However, with so many hurdles ahead, it’s impossible to predict how sterling will react.

Anyone making foreign-currency transfers in the next few years will have to be prepared for sterling volatility.