What’s Next for the Pound Sterling?
In my previous currency forecast, I predicted that GBP/EUR exchange rates would hit 1.10-1.15 following the outcome of the Referendum, and as of October, GBP/EUR has been unable to break these ranges and continues to trend on the lower end of 1.12.
In fairness, these current lows are being driven more by the political attitude towards Brexit, and not by economic indicators, which remain positive. The weaker pound is having some short-term benefits for the UK’s economy, British exports and foreign investment remains attractive for those buying goods or services in sterling, which all-in-all is helping bolster the UK economy in times of serious economic uncertainty.
But how long can the UK economy continue to chug along in Brexit limbo before it impacts the lives of your average household? And where are GBP/EUR exchange rates heading next?
Sterling movements to be impacted by economic sentiment
It is almost impossible to predict where sterling exchange rates are heading next, because much of these movements depend on the potential outcomes of what Brexit actually is, and whether the UK is able to secure a deal with the EU similar to the current arrangement.
If, for example, Theresa May maintains the argument that the UK is better off closing its borders at the expense of single market access, GBP/EUR exchange rates could fall to parity as predicted by UBS. Personally, I think these estimates are under-exaggerated for a number of reasons. The UK, without access to the single market, is potentially a very crippled economy. The UK’s biggest export, its financial services, could be in jeopardy without access to the single market and a retention of its passporting rights. Also, the UK is a net importer and imports more from the EU than any other trading partner. In the event the UK left the single market entirely, it could find itself defaulting to WTO trade tariffs, which would make EU imports subject to import duties.
With added costs on German cars, for example, it would be the consumer that would absorb these extra costs, creating an environment for lower consumer spending, and at worst, stagflation.
And even if the UK could fill its boots with free trade agreements elsewhere, it would take considerable time to arrange such deals, leaving the UK in a much less favorable position than it is in currently. One only needs to look at the recent failed CETA trade deal (Canada-EU) which took 7-years to ratify.
In the event that the UK pulled the plug on single market access, GBP/EUR exchange rates of 0.80-0.90 would not seem improbable.
However, if the UK can retain access to the single market whilst addressing the concerns of those who voted to leave, we could see the exchange rates seen prior to the Referendum result. But when will this be?
Sterling exchange rates to remain vulnerable until at least 2019
Sterling exchange rates could get worse before they get better. With Parliament split over Brexit strategies, uncertainty could continue into next year, up until the triggering of Article 50.
Once Theresa May invokes Article 50 and officially begins the process of leaving the EU, negotiations will take place which are set to continue for at least 2 years.
As Theresa May plans to start the process by March 2017, it could be 2 years from then before we have a full understanding of what direction the UK is heading, which in my view, prevents sterling from making a full recovery against its major counterparts.
As markets become increasingly nervous about the invocation of Article 50, I am predicting GBP/EUR exchange rates to fall close to parity by March 2017, with further falls likely unless single market access is preserved.
There is then the concern that the UK economy could fall into recession if business and consumer confidence takes a hit, which makes economic data far more important going forward. The UK remains a fragile economy with signs of slowdown likely to cause a fall in overseas investment.
The ideal outcome is for the UK to secure a deal as early as possible to prevent further downslides, but given the complexities of the UK-EU relationship, it’s highly unlikely such a deal will materialize overnight.
If you are buying large amounts of foreign currency in the short to mid-term, there are a number of contract options available to you which could help mitigate potential losses.
Contact options that could help you in the event of further sterling losses
In the event that you are transferring large sums overseas, making the most of spikes in the market, coupled with a contract option from a currency broker, could help mitigate some of the losses as a result of the Brexit vote.
For example, a forward contract option allows you to lock into current exchange rates for up to 2 years, giving you peace of mind in the event that further slides to sterling materialize.
Alternatively, timing may not be crucial to your currency needs, and you may wish to wait until the rates become more favorable. A limit order in this instance allows a broker to purchase your funds once it reaches your desired rate of exchange.
Speak to a currency broker today about the different options available to you during this very volatile period. In most cases, a currency broker will be able to arrange better exchange rates than your bank, which could save you thousands on a large transfer.