In recent weeks, 24 hours has been a very long time in UK politics. There is nothing short of an all-out Brexit war within the House of Commons.
The ongoing drama, as a result of the Brexit impasse, is playing havoc with the pound’s value and creating significant volatility, which is influenced by the smallest amount of good or bad news.
The pound reached a 23-month low against the euro in August as concerns over a no-deal Brexit escalated. On August 11 it reached €1.06 but has since recovered to €1.12 in September.
Hamish Muress, Senior Currency Strategist at OFX, said: “We all thought there was a General Election on the cards, but that has currently gone out of the window. Although there are some clients who are taking a ‘wait and see’ approach to book transfers, other clients are actually taking advantage of the volatile pound with the right strategy to lock in rates.”
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Despite a new deal being approved by the EU and UK Prime Minister Boris Johnson, the main problem has been Johnson’s forceful approach to pushing through Brexit ‘do or die’ on October 31. This prompted Parliament to act and pass a law to try and prevent a no deal Brexit happening.
Johnson’s do or die approach has lost his majority in the House of Commons thanks to a combination of defections to other parties and his sacking of 21 of his own MPs who decided to vote against their party on Brexit, leaving the Government relatively impotent. The minority Government the PM holds makes it very difficult to judge the outcome of any vote on any bill or amendment. This often leaves the pound on tenterhooks.
On the weekend of 19th October the Government lost a key vote that stopped approval for Johnson’s deal till the withdrawal agreement itself is cemented in law. More recently, Boris has partially side stepped this law by sending two letters to the EU, one officially asking for an extension, whilst personally also sending one advocating the opposite.
Even so, all areas of British and Brexit politics are moving at pace, so it is hard to predict exactly where Britain goes next.
The constant upheaval means the pound is fluctuating wildly against other currencies, with the slightest bit of good or bad news prompting significant moves – essentially the position we have been in with sterling for a long time now. It looks unlikely that things will become more settled in the short term.
Also see: Six factors influencing exchange rates and what you can do about it
The strengthening US dollar, one of the key safe-haven currencies, has done little to help the pound with GBP/USD hitting 1.20 on August 10, but again the pound has rallied and is at 1.23 at the time of writing in September. The volatility is unnerving but can be beneficial for businesses who need to move significant amounts of money overseas if they can time it right.
For example, if you’re in the UK and your business needs to buy microchips from Silicon Valley, and you transfer pounds to USD 100,000, the difference between buying USD in August versus a few weeks later could be costly. On August 10 it could have cost £83,333 but at the time of writing in September it could have cost £81,300 – £2,032 less.
Mr Muress said: “The most common question we are asked – and forget about the different scenarios here for a second – is ‘how low can the pound go?’ As things stand, I think we have reached the bottom. We have gone under USD 1.20 when things have looked very uncertain, and that is when it looked like a no-deal Brexit was on the cards.
“If we end up with a no deal Brexit and Boris has broken the law [to make it happen], it could drop further. ”
What happens after a potential General Election is unclear, as there is in-fighting in the Labour Party about their approach to both Brexit and the election, and only the Liberal Democrats are definitive about wanting to stay in Europe. So much so, they have now voted at their party conference to revoke Article 50 on day one if they are swept to power.
Jake Trask, FX Research Director, is working with global businesses to plan ahead in volatile times.
“With the pound still engulfed by Brexit uncertainty and a no deal Brexit still a very real threat despite the passing of a law to stop this, businesses would be wise to consider mitigating the impact this scenario could have on the value of the pound.
“Those concerned by the damage a no deal Brexit could cause on profit margins should think about forward buying currency now, while sterling has staged a slight recovery.
“Targeting a better rate of exchange via a Limit Order has been a good way to take advantage of recent sterling gains. Or if you import supplies or services from the UK, you may be looking to take advantage of the pound at a weaker moment. Our team of currency experts watch the market 24/7 on your behalf to leverage desired rates of exchange. We automatically buy currency when the rates are beneficial. Our clients count on us to protect their business from uncertainly, more so in this current volatile climate when the timing of a transaction can be critical.”
Talk to OFX to learn more about how we can help you mitigate currency risk with Forward Contracts and Limit Orders.
Economically, Britain is still in a difficult position, although the anticipated recession has been staved off for now. GDP grew more than expected in September1, even though it was still only 0.3% up month-on-month.
Yael Selfin, chief economist at KPMG2, said: “Given the time that has passed since the vote was cast, a casual observer would have assumed that by now arrangements between respective governments would have been made, businesses would be prepared and everyone would know what to expect from the future relationship between the UK and the EU.
“The reality is different…[but] a last-minute deal coupled with a two-year transition period could give the UK a respite to find its new place in the world economy. It is rare to live in a period with such bipolar short-term prospects.”
What happens to the pound will very much depend on whether a Brexit deal is reached or not, even though a no deal option has all but been taken off the table unless the Government chooses to break the law. KPMG anticipates that a Brexit deal could increase GDP to 1.5% in 2020, tempered by the background of slowing global economic growth.
Even with a deal, the full details of the trading relationship with Europe will take time to resolve, said Ms Selfin, but on news of a deal the pound could appreciate by as much as 10-15%. For businesses trading overseas, the potential strengthening of the pound would be good news if they buy goods and services from outside of the UK.
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IMPORTANT: The contents of this post do not constitute financial advice and are provided for general information purposes only without taking into account the investment objectives, financial situation and particular needs of any particular person. UKForex Limited (trading as “OFX”) and its affiliates make no recommendation as to the merits of any financial strategy or product referred to in the blog. OFX makes no warranty, express or implied, concerning the suitability, completeness, quality or exactness of the information and models provided in this post.
1https://www.theguardian.com/business/2019/sep/09/uk-recession-economic-growth-gdp
2https://assets.kpmg/content/dam/kpmg/uk/pdf/2019/09/britain-at-a-crossroads.pdf