Home » Currency 101 » Could it be crunch time for Brexit and the pound?

The Brexit transition period is due to end on 31 December 2020 and negotiators from the UK and the EU have been working around the clock to secure a trade deal. Recent reports, however, suggest that key sticking points remain, which has fuelled worries about a ‘no-deal’ scenario. With many uncertainties at play, could Brexit have a significant impact on the currency markets in the coming days and weeks?

Hopes for a post-Brexit trade deal have strengthened the pound recently. However, conflicting reports and the possibility of a no-deal have the potential to create volatility in the markets.

If you are planning to buy an overseas property in the new year or need to make regular payments in foreign currency, lock in a forward contract now to ensure that your budget isn’t affected by Brexit.

What are the key sticking points?

There are three main sticking points that need to be resolved before a deal can be reached and both sides will need to make compromises to overcome these. Reports suggest that these issues are still present, which has raised concerns that there will be no trade deal.

Fisheries – how much access should EU boats have to UK waters?

The level playing field – a set of rules that prevent businesses in one country gaining a competitive advantage over businesses in another. The EU would like this to be maintained if the UK is to access the single market and agree on a zero-tariff, zero-quota trade deal.

Governance of the deal – How will the rules of the deal will be enforced in the future and what happens if one side breaks them?

When could a Brexit deal be finalised?

The UK and the EU have set a soft deadline of this Sunday December 13. There have also been suggestions that EU leaders want to see the deal before it is agreed. Other headlines have stated that some EU members would be happy to see talks continue into 2021, but this has been rejected by the UK government.

What does ‘no-deal Brexit’ mean?

A ‘no-deal Brexit’ would mean that the UK leaves the Brexit transition period without a trade deal with the EU. The UK would then trade on World Trade Organisation terms, meaning that the EU would impose tariffs on UK goods. This could have a big impact on UK businesses that trade with the EU and the UK economy.

How could the pound react?

As the Brexit transition deadline draws closer, uncertainty surrounds talks and news of progress is conflicting and changeable. This, therefore, makes it extremely difficult to predict how currencies will react in the coming weeks and months.

A basic trade deal: 

In the case of a limited Brexit agreement, the pound could initially trade higher against the euro and the dollar.

Then, further into 2021, the no-deal Brexit risk premia could disappear, offering sterling even more support, especially against the dollar.

No-deal:

Without an EU trade agreement in place, the UK would face enormous structural headwinds. which could push the pound significantly lower. The no-deal Brexit impact on the pound could last for an extensive period of time.

Whether a deal is agreed or not before the end of the year, frictions between the EU and UK over the details and practicalities could continue for many months.

Your next steps – are you ready for Brexit?

As the Brexit deadline draws closer and more news is released regarding the state of negotiations, we could see a volatile currency market. This could affect the value of your budget, making buying a property or regular payments overseas more costly than you expected.

It’s worth taking action now to ensure that your money is protected. You can do this easily by talking to our trading team about putting a forward contract in place. They will consider your requirements and suggest the best solution for you.

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