The Pound Sterling crashed to a 31-year low last year after the historic Brexit referendum in which Britain voted to leave the European Union. Some people believe that Brexit will ultimately benefit the economy of the UK even though there mere might be some initial turbulence; many others believe that Brexit can only trigger chaos in the UK and EU as the populist voice becomes louder. Economists have been pitching their tents on both sides of the divide but it is obvious that no one really knows how Brexit will pan out.
Nonetheless, words are powerful and keen observers can deduce how the economy is likely to fare during and after the Brexit negotiations based on feelers from people close to the developments. This piece provides insight on how some developments in the UK economic landscape could affect the Pound Sterling as Brexit negotiations continue.
The pound sterling is seeing the calm before the storm
The Pound Sterling crashed to 31-year lows after last year’s Brexit vote but the currency is slowly regaining lost ground. Yet, we cannot but note that the Sterling is still down 14% against the Euro and 16% against the USD since the Brexit vote. In the first week of July, the Pound Sterling crashed to as €1.1184 following the words of BoE Deputy Governor Broadbent to mark the lowest since November last year.
However, as at the middle of July, the Pound Sterling has retraced its steps to €1.1428; yet, economists are worried that the forex gains in the pounds will be short-lived because the fundamental factors keeping the currency depressed are still very much in place. Hayden Alphonse, an analyst at ECN Capital submits that “the pound is seeing the calm before the storm as investors watch the developing stories around Brexit to know Theresa May’s odds of a smooth Brexit.” Conversely, economists have started upgrading bullish sentiments on the prospects of the Euro as the ECB continues to take proactive steps to wind down its stimulus program.
BoE warns Brexit could hurt UK and EU
Earlier in July, a coalition of UK businesses urged Prime Minister Theresa May to press her government to work out a smooth Brexit because a hard Brexit would affect trade and investments negatively. Now, the Bank of England Deputy Governor Ben Broadbent while speaking in Aberdeen to the Scottish Council for Development and Industry aired the same sentiments. Broadbent observed that “trade really is mutually beneficial and less of it costs us all (the EU and the UK that is)”. Broadbent also observes that a hard Brexit will reduce the revenue that Her Majesty earns from services exports while simultaneously increasing the cost of imports such as machinery and food.
In another development, analysts at rating agency Moody’s have also lent their voice to bearish outlook of the UK’s economy following a hard Brexit. The rating agency notes that the prospects of Britain’s economic growth are “materially weaker” if Theresa May fails to get a smooth exit. Part of the statement from the rating agency reads “The UK economy has started to slow, and Moody’s expects the UK economy to weaken significantly through the remainder of this year, with the baseline scenario seeing growth declining to 1.5% this year and 1.0% in 2018, compared to 1.8% in 2016.”