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The British pound has a proud tradition as the world’s leading currency. It is currently under great pressure and the deep drop has been exacerbated by Brexit. This has consequences for the UK economy and for the EU.
By Thomas Spinnler, boerse.ARD.de
Britain left the EU in January. Now there is time until the end of the year to conclude an agreement on future trade relations with the EU. Until then, Britain remains part of the EU internal market and the customs union. New negotiations begin this week.
So far, it doesn’t seem like rapid progress can be expected – the risk of a hard Brexit is growing. About four months before the end of the transition period, there is no sign of an agreement on a comprehensive free trade agreement with the EU, said Thu Lan Nguyen, a currency expert at Commerzbank. Without an agreement, a strong economic breakdown threatens the turn of the year.
Perfect storm for the British pound
A hard Brexit would hit the UK economy at an inopportune time. Due to the corona pandemic, it has slid into an unprecedented severe recession. In the second quarter, British economic output contracted 20.4 percent compared to the previous quarter. And the forecasts are pessimistic: there is a risk that it will take “several years” for the economy to return to full capacity, warned a Bank of England (BoE) central banker, Gertjan Vlieghe.
In addition, there is great concern about a massive increase in unemployment. That is why the central bank and the public have long been discussing what steps the Bank of England can take to support the economy. The key interest rate is currently at a historically low 0.1 percent.
Recent concerns from various central banks are likely to keep the debate on negative interest rates in the UK alive, said Adam Cole, chief currency analyst at RBC. “In addition to the pandemic, the risk of a hard Brexit at the end of the year still weighs on the economy. Therefore, I look forward to further discussion of potential negative key interest rates and an increase in bond purchases in Britain.” says Ulrich Stephan, chief private equity and private equity investment strategist. Corporate clients at Deutsche Bank. All of this, coupled with the weak economy, would have an extremely negative impact on the pound, which has been under pressure for months anyway.
A few weeks ago, Sonja Marten, an analyst at DZ Bank, noted that a near-perfect storm was brewing over the currency above the pound: Crown, the ongoing severe recession, and of course the approaching Brexit are the factors. key, according to Marten.
Pounds on the way to insignificance?
“If trade negotiations fail completely, trade between the EU and the UK will be subject to tariffs from New Year’s. This will have a major impact on the UK economy and the value of the pound will decline significantly,” he said. Kim Blindbæk, Forex Expert. the Danish Sydbank.
That would be a severe blow to both parties, emphasizes Commerzbank expert Nguyen: “But above all to the British economy, for which the EU is by far the most important trading partner.” 43 percent of exports of goods and services go to the EU, 51 percent of imports come from the EU.
In a widely acclaimed analysis, experts at the US Bank of America were highly critical of the future prospects for the British currency, which, along with the dollar, euro, yen and Swiss franc, has so far been a major most traded and stable currencies in the world.
“We believe the pound is on its way to becoming a currency that resembles the reality of the UK economy: small and contracting with a growing deficit problem,” writes analyst Kamal Sharma. The result is a larger fluctuation range for the pound, roughly comparable to an emerging market currency. David Bloom, HSBC’s chief analyst, told US broadcaster CNBC that the pound has become a currency for risky investors that will change wildly.
The consequences for the UK and the EU
A currency that tends to be weak and fluctuating will make EU exports more expensive for Britain. Then there is the trade deficit with the EU: in 2019 it was 72 billion pounds. These debts also become more expensive as the currency depreciates. That deficit will simply no longer be possible in London. A wildly fluctuating pound also means increasing costs for exporting companies when they have to hedge their global businesses against currency risks.
However, a weak pound means that British goods are cheaper abroad. That, in turn, would increase the competitiveness of the economy and consumers would be inclined to turn more and more to local products, if they exist at all. No one knows what the balance will really look like in the end.
Those: boerse.ard.de
