Brexit Fears Return, And The Pound Struggles

Brexit Fears Return, And The Pound Struggles

over 3 years ago2 mins

In a return to business as usual after weeks of wall-to-wall coronavirus news, investors’ attention is shifting towards next month’s fast-approaching deadline for the UK to seek more preparation time for its European Union (EU) departure.

What does this mean?

The British pound has had a tough year, driven partly by a pandemic-fueled rush to the safety of the US dollar. But two local trends are also reducing investors’ willingness to purchase pounds: Bank of England (BoE) policy and Brexit.

The pound has fallen against the dollar
The pound has fallen against the dollar

As the COVID lockdown hits the UK economy, the BoE is considering taking interest rates below zero for the first time to avert deflation. Lower interest rates mean lower yields on UK investments, hence a weaker currency.

But politics are having an impact too. After agreeing to leave the EU last year, Britain is in a “transition period” that runs until year end. Unless the two sides can forge a trade agreement before then, goods moving between them may be hit by import taxes (a.k.a. tariffs).

Trade talks – which resume on June 1 – have so far made little progress. The two sides could agree to extend the transition period, but the politics might be difficult. The deadline for an extension deal is June 30, hence the renewed investor focus.

Why should I care?

Beware: further declines in the pound would hurt the value of any investments you own priced in that currency – like UK stocks or bonds. And, if research firm TS Lombard is correct, coming weeks and months could be fraught 😬

“We think the June deadline will come and go with no agreement – but all outcomes remain possible this coming winter, from no-deal, to a deal, to a last-minute extension,” they wrote in a report this week.

TS Lombard pointed out that the pound looks cheap compared to its theoretical “fair value” but investors are not yet positioning for further losses – meaning the chance of a pound rebound isn’t great.

Traders' positioning (labeled IMM) suggests limited pound gains, TS Lombard reckons
Traders' positioning (labeled IMM) suggests limited pound gains, TS Lombard reckons
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