The impact of Brexit on the Pound Sterling

The Brexit negotiations are in a critical phase. The pressure on British Prime Minister Boris Johnson to reach a trade agreement with the European Union is increasing rapidly. The outcome will obviously have a major impact on anyone trading in Pound Sterling. Isabel and iBanFirst can see both pitfalls and opportunities.

We are in the last stretch of an eventful year. The coronavirus crisis and the American presidential elections snowed under the Brexit deal somewhat. The consequences for business should not be underestimated, however. As a facilitator of international currency payments, Isabel partner iBanFirst follows the latest developments closely. Ivo Mertens, FX Strategist at iBanFirst, discussed the impact of Brexit on the Pound Sterling in an Isabel webinar.

Brexit effect in 2016

To grasp the current exchange rate fluctuations of the Pound Sterling, we zoom in on the Brexit timeline. In June 2016, the referendum triggered an earthquake in British politics. The result was unexpected and had not been predicted by the polls. The exchange rate of the Pound Sterling, which had strengthened against the euro in previous months, attests as much. In the days and months following the referendum, however the Pound went into free fall. The currency even depreciated more than ten percent against the euro.  

Flash crash

The exchange rate of the Pound has fluctuated continuously since then, but never structurally in any particular direction. The best proof: today, it is at approximately the same level vis-à-vis the euro as at the beginning of November 2016. One of the strongest fluctuations occurred in October 2016, when the Pound lost 7.8% of its value in a so-called flash crash. This additional drop was brought about in particular by impulsive reactions from inexperienced traders, which resulted in too many sell orders. According to Ivo Mertens, the large contraction in prices that followed illustrates the great nervousness and limited liquidity in the exchange rate market.

The saga goes on

On 29 March 2017, the United Kingdom formally notified the EU Member States that it wanted to leave the EU. Article 50 initiated the withdrawal negotiations. On 13 November 2018, the UK and the EU signed a provisional agreement on the Brexit arrangements. When attempts to gain wider parliamentary and popular support failed painfully, then British Prime Minister Theresa May threw in the towel.

Uncertainty not appreciated 

In the meantime, an actual exit date was not fixed and an agreement not reached: a scenario that the markets did not applaud at all. Whatever the outcome, the economic world expects clarity above all. The outcome will not be long in coming. In the autumn of 2019, the Pound Sterling would plummet once again. On 12 December 2019, British Boris Johnson led the conservatives to victory once again and became prime minister. A week later, the House of Commons approved the withdrawal agreement, which made it possible for the United Kingdom to leave the European Union on 31 January 2020. A transitional period is to run until 31 December 2020.

Hot issues

Today the negotiations are in a crucial final phase, but a crystal ball is needed to see whether a hard or a soft Brexit will ensue. Important items on the agenda remain the possibility for EU fishermen to fish in British waters, the definition of a level playing field on licences and monopolies, and the agreements with Ireland and Northern Ireland.

Nervousness holds sway

Ivo Mertens estimates the chance of robust price movements in the near future as well. The market expects the volatility of the Pound to exceed that of the US Dollar by 30%. When market participants want to buy pounds en masse, while no one is selling, major price changes will occur due to a lack of liquidity. Market nervousness therefore remains a constant.

Hedging exchange rates

Irrespective of the agreement, Brexit will affect financial transactions with the UK. Payments to and from the British Isles will of course continue. This can also be done via a Pound account with a Belgian financial institution. However, financial institutions that do not have the necessary licences will no longer be able to offer their services in the United Kingdom and vice versa.  

Opportunities

In the event of a hard Brexit in particular, companies may scale back trade with the United Kingdom due to excessive complexity. Ivo Mertens also expects that trading partners in the UK will be less inclined to pay in euros and therefore prefer transactions in pounds. Anyone who chooses a good partner for hedging future exchange rates will turn a disadvantage into an advantage in such a case. Brexit therefore also offers the necessary opportunities.  

Integration of iBanFirst in Isabel 6

Ivo Mertens underscores the added value of iBanFirst in that scenario. A company can pay or receive money free of charge from the UK through that platform and exchange it to and from euros at competitive margins. iBanFirst also offers various instruments to hedge your transactions against future fluctuations at favourable conditions. Isabel 6 offers an integration with iBanFirst, giving users real-time access to the exchange rate when making a foreign currency payment.

Isabel 6 provides a central and clear overview of your accounts with numerous banks.  Curious about how the platform responds to the international currency markets thanks to integration with iBanFirst? For more information, go to Add iBanFirst to Isabel6