Brexit flirts with disaster and “leads the pound to falls of 10% if there is no agreement”

The summit of the European Union (EU) this November has passed without pain or glory for the drama of Brexit and there have been no progress in the negotiations. At this point, and given the few weeks that remain until the extension of December 31, there are few possibilities on the table: “A pyrrhic free trade agreement with potential concessions in fishing and state aid against the risk of hard Brexit, “says Stephen Innes, analyst at Axi.

As the leaders of the EU and the United Kingdom look to failure, analysts agree that the British pound will be in the focus of investors, as well as its peers. The British currency has been one of the worst performing G10 currencies in recent days, “Partly because of reports that some EU countries insist that no treatment is better than bad treatment,” say MUFG experts. All in all, the performance of the ‘cable’ (pound / dollar) has been positive since the end of September, but above all due to the weakness of the dollar. Against the euro, it trades in a narrow range below 0.90 pounds.

After the events of this Thursday, when it has also transpired that negotiations have been suspended due to a Covid contagionyet observers still wait a deal early next week or the first week of DecemberTherefore, investors “are not really concerned about the risk that a trade agreement will not be reached,” add the experts from the Japanese entity. This scenario makes it difficult for the pound to star in a substantial rally if the experts’ forecasts are actually met and what the market has largely discounted.

State aid to companies and fishing rights remain the main sticking points in talks that have dragged on for eight months. The EU wants to keep its current access to UK fishing waters, while Great Britain resists the bloc’s efforts to force it to sign the level playing field for companies.

Now, Negotiations will continue until the next EU summit, to be held on 10-11 December. If an agreement has not been signed by then, it is to be expected that preparations for the country’s exit from the single market without a pact will feature prominently on the agenda. Any treaty has to be voted on at this year’s last meeting of the European Parliament, which will take place from December 14-17. The December 31 stipulates the end of the Brexit transition period. The last and immovable term. If the two parties have not signed a trade agreement, the UK will only be able to trade with the EU under the terms of the World Trade Organization.

As it is, there is probably a much wider movement in the currency if both parties do not reach an agreement, with falls of up to 10% in the ‘cable’, according to Innes and between 5% and 10%, predicts MUFG, while the pound will fall 9% against the euro and in the euro / dollar it is expected a negative movement of 2%. On the other hand, if some kind of treaty is finally achieved, the relief rally will be more modest, ranging from 1% to 4% for the pound / dollar, according to the Japanese bank, and 3%, according to Innes. In the scenario of an amicable divorce, the Axi expert points for a rise of 2% of the pound against the euro and in the euro / dollar a positive movement of 1% is expected.

“Beyond the yo-yo of Brexit, sterling trends have been closely correlated with global growth,” Innes explains. “Given that the momentum of the vaccine could be a help for the service sector, of great importance in the UK economy, the Brexit movement on the pound sterling could come to nothing since the vaccine means fewer risks”, assumes the expert .

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