The British Pound and Brexit – What Happens to the UK Economy?
The British Pound (GBP) experienced a dramatic change in the years following the Brexit referendum. The four and a half years that already passed transformed the price action in the GBP pairs completely. Flows suggest that the pound has become more of an emerging markets’ currency, trading in a similar fashion.
For most of this transition period, the pound depended on Brexit news rather than on what the Bank of England did. Also, it was mostly floating in response to what other currencies did. For example, in 2020, the pandemic triggered a higher USD initially, and then a lower one, as the Fed intervened. Despite the fact that the Bank of England intervened too, the pound did not have a “life of its own” – it just followed the general USD lower theme.
2021 will be a challenging year both for the GBP and for the UK economy. Today, Goldman Sachs announced that it filed a request to the French regulator to open a trading venue in Paris, France. The move comes in response to efforts to diversify from the City after Brexit – a project called Sigma x Europe. Hundreds of more similar moves took place in the years after the Brexit vote. What will life after Brexit look like?
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The transition period is planned to end on December 31st. By that time, the ideal scenario involves a trade deal in place between the EU and the UK. However, despite intense negotiations and progress, the two parties are “not there yet”. In any case, as long as discussions continue, a solution will be found.
What happens if December 31st passes and no deal is in place? The answer – nothing. And everything. Brexit will not be delayed, negotiations will continue, and so will life. On January 1st, the EU adds full border checks, UK only partial ones. By April 1st, the UK will start requiring animal/plant documents, and by July 1st, the UK switches to full border checks too.
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No matter how you put it, only by looking at the cross-border hustles, this is a step back for both the EU and the UK. Unnecessary borders only add unnecessary costs to the trade between the two.
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The GDP is unlikely to drop in the UK in 2021. Even if a deal will be reached, the costs for businesses will rise, and this, in turn, will affect the GBP as well as the recovery.
The Bank of England most likely kept the bulk of its ammunition intact. If it needs to fire some more, it will not hesitate to do so in 2021.