Brexit has been instrumental in the pound’s trajectory, responsible for its collapse and slow recovery. The coronavirus pandemic comes to add more pressure to the pound due to the lockdown measures and the ensuing adverse economic effects.
In the short term, as the UK grapples with the threat of Brexit and the coronavirus, the outlook looks extremely negative. But, how will the pound fair in the long term?
What’s happening now?
Sterling has been hit by Brexit and the coronavirus crisis, with the latter making its effects on the British currency very clear in mid-March, when the GBP plunged to levels not seen in 35 years with anxious traders turning towards safe havens such as the greenback. Until the pandemic is over, analysts predict that the pound will continue to be weak. At the moment, Sterling will remain reactive to headlines concerning the pandemic which has triggered the deepest decline in economic activity since 1929.
Indeed, things have changed a lot since last December when traders felt optimistic about Boris Johnson’s decisive victory in the general election, with many expecting significant progress in the Brexit talks and positive economic data.
Now, with the transition period due to expire at the end of the year and the government saying that it will not ask for an extension, the reality looks different, with the possibility of leaving without a deal posing a real threat to the pound’s future. This means that the UK could fall into a recession as economists have warned.
Georgette Boele, Senior FX Strategist at ABN AMRO has said: "In the near-term we expect another wave of risk-off in financial markets as markets are in our opinion too optimistic currently on the speed and strength of economic recovery." Boele added: “There is an enormous gap between the economic reality and what analysts forecast, on the one hand, and the optimism among investors for the second half of this year, on the other. This should support the U.S. Dollar as most liquid safe haven currency."
Following Brexit, the forecast for the pound has been dire. As Brexit troubles are not over yet, and as the coronavirus continues to inject fear in investors, the long-term outlook for the pound is definitely bearish.
Since the June Brexit referendum, consumers have underpinned Britain’s economic expansion as businesses stopped investing. Despite the fall in the pound, consumer spending has grown since the vote, and with many businesses now closed due to the coronavirus, understandably, there are concerns for an economy so reliant on consumption.
With the economy hurt due to lockdown restrictions and a lack of exit strategy, the pound will be under pressure for the long term.
GBP: Investors turn bearish
In the Financial Times article “Investors turn bearish on the pound,” Philip Georgiadis writes that investors are anticipating further falls for the pound and have “increased their bets against the UK pound to the highest level of the year, raising the spectre of a new bout of volatility for the currency.” According to the article, “fund managers and other companies betting in the futures market have turned bearish as concerns over Brexit rise in parallel with the damage the coronavirus pandemic is causing the UK economy.”
Similarly pessimistic is Rabobank which says: “Additionally, insofar as no real progress was made on the last round of post-Brexit talks between the UK and the EU and given that the summer deadline for any request for an extension to the transition phase is looming, it is difficult to be optimistic on GBP.”
Analysts at Danske Bank also find that in the coming months the pound will remain under pressure as “Time spent fighting the coronavirus by both the UK and the EU means less time to negotiate a deal before the end of the year, increasing the risk of a big trade shock by 1 January 2021.”
While overly optimistic valuations might fall to meet reality and as such drive the pound lower, there is also the possibility of the British currency strengthening as the global outlook improves. Sterling’s weakness due to global uncertainty could be reversed as nations successfully fight the virus and recover.
What is certain, is that there are no certainties and the pound could easily come under pressure as optimism withers.
How UPFX can help
If you have a Sterling transfer, wish to better understand the market outlook or want to discuss your FX needs with a foreign exchange currency specialist, please get in touch with Universal Partners FX.
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