Abu Dhabi, UAETuesday 21 May 2019

UK pound in for a tough period if Brexit deal voted down

Sterling is expected to rise, however, if the likelihood of a softer EU exit increases

Brexit Secretary Stephen Barclay arrives for a cabinet meeting in London ahead of the parliament vote. EPA.
Brexit Secretary Stephen Barclay arrives for a cabinet meeting in London ahead of the parliament vote. EPA.

The British Pound is expected to be extremely unpredictable on Tuesday in the lead up to parliament’s vote on the final Brexit deal – in which the Theresa May’s government is expected to lose.

While Sterling rose on Tuesday initially, in a move indicative of the expected upheaval it plummeted late afternoon by 0.19 per cent against the Euro to 1.1201 by 5.10 pm GMT. It fell 0.80 per cent against the US Dollar to 1.2764 by 15.00 pm GMT - a drop of over one cent.

David Meier, an economist at Julius Baer, said in the short-term the pound could be expected to fall in light of the upheaval emanating from the likely political turmoil after Tuesday’s vote.

The outlook in the long-term was more positive “as a deal, a softer Brexit or a process leading to an aborted Brexit, would improve sentiment where it currently stands.” A no-deal Brexit remains the biggest potential risk. “UK equities may benefit from attractive valuations and improving earnings growth dynamics, if a no-deal Brexit can be avoided,” added Mr Meier.

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TransferWise said it was limiting transactions to and from the UK to £10,000 on Tuesday given the increased chance of exchange rate volatility. In a statement, the company said: if something is happening in a country that might affect the currency markets — like government instability or a significant vote — we’ll take steps to minimise the impact on our customers.”

According to WorldFirst, the international currency exchange specialists, if the date for the UK exiting the EU is not extended after March 29, the pound “could be in for a tough few weeks.” Should the vote fail, much is dependent on the response EU and opposition leaders and margin of defeat.

Both FairFX Group Plc and WorldFirst reportedly will be open later than normal to cope with the added pressures.

A possible path, albeit unlikely at this stage, that could follow is one that eventually leads to opposition leader Jeremy Corbyn and his shadow Labour government taking power. The idea of Mr Corbyn's shadow finance minister, the strongly left-wing John McDonnell, "would send a collective shudder through markets," according to Jasper Lawler, head of research at London Capital Group.

A vote of no confidence in Mrs May could also result in Sterling taking a hit.

"We think a Brexit delay by revoking or extending Article 50 is ultimately what we are facing," said Mr Lawler.

"Delaying Brexit might allow trader's attention to get diverted elsewhere and put a floor under Sterling, but the resulting uncertainty would be one of the worst scenarios for businesses and the British economy," he added.

Updated: January 15, 2019 09:25 PM

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