The pound fell early on Friday before strengthening, while the US dollar grew stronger. The British currency’s performance will depend on Brexit developments, but the dollar is expected to remain strong on expectations of a Federal Reserve rate hike by June 2022.

In regard to Brexit, Ireland’s Foreign Minister Simon Coveney said on Thursday that there is still time for a solution to Brexit's Northern Ireland protocol. The European Union is also planning to improve its offer to reduce customs checks at the Northern Ireland border.

In the coming weeks, Brexit minister David Frost will engage in intensive talks with the EU to reach an agreement. These positive developments have not yet impacted on the pound, but it will depend on investors’ focus as they turn away from Central Banks’ policies towards Brexit.

Brexit impact could be limited

Brexit anxieties have an immediate effect on the value of the UK currency and the possibility of the UK triggering Article 16 or any deterioration of the EU-UK relations could have a considerable impact.

Sterling may suffer if the European Union retaliates after a possible triggering of Article 16. However, economists believe that the negative impact of Brexit has been mostly price in the pound, so the effect of Brexit might not be as damaging to the currency as some analysts have suggested.

Also, as some other analysts have noted, any deterioration of the relationships or a suspension of the trade deal might not have significant economic effect. As ING’s James Smith and Chris Turner noted, “none of this necessary spells disaster for the pound.” They clarified that “much of the cost burden associated with Brexit comes from form-filling and customs processes, which are already in place. To qualify for zero tariffs under the current deal, companies need to prove that their products have sufficient EU or UK content to qualify, which can be very expensive in itself. In some instances where tariffs are low, it may already simply be easier to pay a tariff than document a supply chain.” They believe that any “additional economic effect of reverting to ‘no deal’ on top of that may not be as considerable as perhaps supposed.” For them, Brexit tensions will not change the Bank’s intension to hike rates, perhaps more gradually than markets initially expected. ING analysts highlighted that more crucial factors for the Bank remain the labour market and labour shortages.

How will the pound fare?

There is a possibility that the trade agreement could be suspended, but this will require further negotiations. The effect of leaving the single market and customs union last year was the major event, and economists argue that anything else happening now might not be as damaging for Sterling.

Obviously, increased uncertainty will hurt markets, but for some analysts this is not going to be as bad for Sterling as some have stated.

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