Is Brexit Still A Big Deal For The Pound?
Brexit remains a significant risk and influence for GBP.
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Is Brexit seen as a positive or negative, given the price action we've seen recently in the pound?
One of the head scratches in the pounds case recently has been the strength that we're seeing in the currency despite all of the associated risks involved. As the current stance of the economy, and the risks involved with Brexit are both pointing to a weaker currency and not a stronger one.
Now starting with the economic outlook, the economic outlook is looking very bleak right now, and the hit that the UK economy took from this pandemic has been absolutely staggering. I mean, here we're sitting with an April GDP number data basically showing that the UK is essentially wiped out almost two decades worth of growth.
And apart from that there's growing uncertainty about employment. And that has raised many investment banks to actually upgrade their expectations for further stimulus by the BOE with many of them recently increasing the probability and the bets of the bank actually moving to negative interest rates.
So at this stage, the UK is also losing out on one of the most monumental stimulus stories that we've seen in a long time, which is of course the tremendous united push from the EU members to make sure that the economy recovers with that massive recovery fund
Now for many money managers, the UK is currently, and I quote from a Bloomberg article, "A very dangerous place to invest in "as they face an impending cliff "of that potential no-deal Brexit, "especially as things currently stand."
Now looking at Brexit and why a deal is important comes down to a couple of factors. But of course, by far the most important one is just trade. Now if we take a look at something like the trade partners for the UK, out of all of Britain's trade partners, the EU is still the lion's share of almost 50% of the country's total trading goods in 2019, coming into 570 billion pounds in trade.
Even though the UK has said that they're okay to leave without a deal, looking at the size of the UK trade with the EU as a whole, even if a deal is struck with the U.S. in time, that will still create a huge shock to the economy and put a massive constraint on trade as a whole, even if it is just temporary. It will also create lots of headaches from trade. And another important thing to keep in mind, is the proximity of trade.
You should always strive to do more business with your closest trading partners. And this comes back to the idea of trade gravity, which is basically the idea that a two-fold increase in the distance between countries leads to a corresponding decline in the trade volume by half.
It makes sense to buy and sell from your closest neighbors due to cost of shipping etc. So given this, it's very important for the UK to broker a deal. And it does pose a cliff edge scenario that will be a big blow to the economy.
If a deal can be broken economies reckon that it will only offset about half of the costs of leaving the EU itself. And then, let's say they do strike a deal, the devil will be in the details, right? So even if some compromises are made, the question will be, what type of impact will that actually, what type of impact will it actually have in terms of trade?
If there is a deal, but it's a light one, ING Investment Bank explains that even if a deal is there it will still create a shock in terms of trade, as companies would need to realign with new rules and new checks, and all sorts of other possible red tape that can lead to some supply chain disruptions and will ultimately negatively affect business. And that is, of course, in the short-term.
Will the market focus its attention on the looming cliff of a no-deal or the hurdle of a light deal? And what type of stress that will cause in the economy? Or will it be more forward-looking in nature once more choosing to look through that and towards a possible stronger UK going forward?
And I would agree with some analysts and economists who've recently said that the currency is moving more like a emerging market currency given its current volatility, and in the near-term, now until we do get more clarity, there's absolutely nothing wrong with just staying on the sidelines with the pound and with UK equities as more investors are currently doing. Just to scope things out and see exactly where these negotiations will be going.
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There’s a link below were you can learn more about it
https://bit.ly/2HFykNd
----
We interpret and explain price moves in real-time, 24 hours a day. Our team of analysts produce text, video and audio commentary.
You understand the markets and trade with confidence. Learn more at our website here: https://bit.ly/2HFykNd
-----
Is Brexit seen as a positive or negative, given the price action we've seen recently in the pound?
One of the head scratches in the pounds case recently has been the strength that we're seeing in the currency despite all of the associated risks involved. As the current stance of the economy, and the risks involved with Brexit are both pointing to a weaker currency and not a stronger one.
Now starting with the economic outlook, the economic outlook is looking very bleak right now, and the hit that the UK economy took from this pandemic has been absolutely staggering. I mean, here we're sitting with an April GDP number data basically showing that the UK is essentially wiped out almost two decades worth of growth.
And apart from that there's growing uncertainty about employment. And that has raised many investment banks to actually upgrade their expectations for further stimulus by the BOE with many of them recently increasing the probability and the bets of the bank actually moving to negative interest rates.
So at this stage, the UK is also losing out on one of the most monumental stimulus stories that we've seen in a long time, which is of course the tremendous united push from the EU members to make sure that the economy recovers with that massive recovery fund
Now for many money managers, the UK is currently, and I quote from a Bloomberg article, "A very dangerous place to invest in "as they face an impending cliff "of that potential no-deal Brexit, "especially as things currently stand."
Now looking at Brexit and why a deal is important comes down to a couple of factors. But of course, by far the most important one is just trade. Now if we take a look at something like the trade partners for the UK, out of all of Britain's trade partners, the EU is still the lion's share of almost 50% of the country's total trading goods in 2019, coming into 570 billion pounds in trade.
Even though the UK has said that they're okay to leave without a deal, looking at the size of the UK trade with the EU as a whole, even if a deal is struck with the U.S. in time, that will still create a huge shock to the economy and put a massive constraint on trade as a whole, even if it is just temporary. It will also create lots of headaches from trade. And another important thing to keep in mind, is the proximity of trade.
You should always strive to do more business with your closest trading partners. And this comes back to the idea of trade gravity, which is basically the idea that a two-fold increase in the distance between countries leads to a corresponding decline in the trade volume by half.
It makes sense to buy and sell from your closest neighbors due to cost of shipping etc. So given this, it's very important for the UK to broker a deal. And it does pose a cliff edge scenario that will be a big blow to the economy.
If a deal can be broken economies reckon that it will only offset about half of the costs of leaving the EU itself. And then, let's say they do strike a deal, the devil will be in the details, right? So even if some compromises are made, the question will be, what type of impact will that actually, what type of impact will it actually have in terms of trade?
If there is a deal, but it's a light one, ING Investment Bank explains that even if a deal is there it will still create a shock in terms of trade, as companies would need to realign with new rules and new checks, and all sorts of other possible red tape that can lead to some supply chain disruptions and will ultimately negatively affect business. And that is, of course, in the short-term.
Will the market focus its attention on the looming cliff of a no-deal or the hurdle of a light deal? And what type of stress that will cause in the economy? Or will it be more forward-looking in nature once more choosing to look through that and towards a possible stronger UK going forward?
And I would agree with some analysts and economists who've recently said that the currency is moving more like a emerging market currency given its current volatility, and in the near-term, now until we do get more clarity, there's absolutely nothing wrong with just staying on the sidelines with the pound and with UK equities as more investors are currently doing. Just to scope things out and see exactly where these negotiations will be going.
-----
If you find this content helpful, you’ll love Forex Source.
There’s a link below were you can learn more about it
https://bit.ly/2HFykNd
