Sterling has broken fresh ground lately as we learn new information on the political outlook for the UK. It is becoming clear the UK will shun access to the single market and this will have big repercussions in the future, more of this later. What this means is that anyone holding sterling waiting on big improvements could find themselves caught out by holding on hoping rates will magically move back in their favour. Any big investors holding the pound waiting for further news have received that latest news and this turning point in the direction of Brexit will have big longer term consequences for anyone buying or selling the pound.
Any doubt that the UK is leaving the EU is now removed with Article 50 the legal mechanism to leave the EU said to be invoked by March 2017. This has caused a big slide in the value of the pound as it removes any uncertainty the UK might stay in the EU or do some ‘back alley’ deal to renegotiate. Theresa May’s speech indicates the direction is to what is being termed a ‘hard’ Brexit rather than a ‘soft’ one. It is this aspect which is the real trigger for sterling losses since the pursuit of a life outside of the single market is not being seen as positive for the UK.
The single market is the jewel in the crown of the EU. The idea is there are no tariffs or trade restrictions on goods between EU countries. The economics behind free trade are that economies become more efficient as countries adapt to the most prosperous business rather than propping up inefficient businesses with subsidies or tariffs on imports. By harmonising rules and regulations on packaging, labelling and other legal requirements on goods and services the idea is that cross border trade is made easier.
The negative impact of leaving this arrangement will be massive as the UK is seen as a gateway to Europe both geographically and politically. Many important businesses have headquarters in the UK to allow access to the single market. By seeking to leave the single market Mrs May has triggered further worries for the future of the UK and this is being reflected in the price of the pound.
There is much more to come and of course the rate won’t just move downward in a straight line, the much better than expected economic data for the UK is welcomed although it is doing little to support sterling. What if we see some bad news on the economy? This month there are key releases on Unemployment and GDP which reflect the period following the vote and will be pored over by investors eager to find clues as to what shape and direction sterling will take next.
If you are considering a transfer involving buying or selling the pound then making some plans is key to managing your exposure. We have just entered fresh new ranges on GBPEUR, GBPUSD, GBPAUD and are touching all time lows on other pairs like GBPNZD. Leaving too much to chance and hope is always the big risk on the currency markets. The true effects of the Brexit so far may not have even really begun…
The author Jonathan Watson is Chief Analyst and Associate Director of one of the UK’s leading FX Brokerages for private clients and business buying and selling currency. With nearly 10 years experience managing client risk on the currency markets he can help with any insight you require to assist in the planning and execution of your currency transfers. For more information please feel free to contact Jonathan directly on firstname.lastname@example.org, call 01494 787 478 or fill in the form below.