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Should we be concerned for the future of the GBP?

Karim Arabi

- Parliament’s rejection of Theresa May’s Brexit plan has caused an unprecedented democratic mess. There are now about 10 weeks left before March 29th, which is when the country is due to leave the EU, with or without a deal, and at the moment there is no viable deal. So where does this uncertainty leave us in terms of the Sterling?

In the past few days, PM Theresa May has made history by suffering the biggest defeat of any modern government after presenting her Brexit plan to parliament. The financial markets were prepared for her to lose, many in fact predicting her defeat would drag the pound down. Surprisingly, after the vote the pound gained in value, rising 0.05% to $1.287 despite declines of more than 1% earlier that day.

Now to most of you, Forex is an incomprehensible phenomenon of nature so a technical analysis of a 4H chart wouldn’t be the best way to explain what happened, but to put it simply, a currency is the first financial responder to political events.

According to that definition, the pound should have taken a big hit after May’s defeat, but instead, it gained in value, and here’s why: Some investors are starting to view the current Sterling valuation as “decently priced”. In 2018, the pound slumped 7%, meaning that a possible poor outcome for Brexit has already been absorbed by the market and therefore already discounted.

A no-deal Brexit has long been seen as the worst possible outcome to the sterling, and what parliament has shown us after the vote is that it is exerting greater control over the process of Brexit negotiations, making the probability of a no-deal Brexit very unlikely.

FX strategists polled by Reuters last week are predicting the pound to rise up 8% over the dollar this year – assuming that Britain and the EU part ways peacefully, keeping a free-trade agreement. “If we get through Brexit by avoiding no-deal, the BoE will be limbering up for rate hikes,” said Sarah Hewin, chief Europe economist at Standard Chartered. “In 12 months, we have sterling recovering to the low $1.40s.”

In conclusion, the future of the sterling remains unclear at the time being, but with the diminishing risk of a no-deal Brexit, buyers are feeling more confident for a potential sterling-positive 2019.


DISCLAIMER: This article does not provide personal investment advice and the writer of this article is not a qualified licensed investment advisor


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