In anticipation of the UK's exit from the European Union, the pound is experiencing serious volatility, repeatedly experiencing ups and downs, which alternate with rare periods of stable equilibrium. The British currency is like a double-edged sword: on the one hand, the problems of Brexit significantly weaken the pound, and on the other, the pound is able to deal a blow to the economy itself.
According to experts, the market is nervous about a "hard" Brexit, the probability of which is growing rapidly. As a result, the value of the pound includes risks of an unfavorable scenario, which does not contribute to the pound's stability. This trend started last Friday and continued at the start of the new week. Moreover, tension and nervousness in the next inconclusive negotiations between the UK and the European Union forced market participants to urgently reconsider their positions on the pound. Due to this, the market shifted to a no-deal Brexit, given this fact in the pound's quotes.
The pound underwent a massive sell-off, losing the gained positions. From the August peaks, it consolidated at the level of 1.3300-1.3400 and declined to 1.2800. Today, the GBP/USD pair was trading near the range of 1.2814-1.2815. There were times that the pair rose to 1.2820, but the pound is still far from the previous peaks.
Many experts are quite optimistic about the pound despite the gloomy trade deal between London and Brussels. Analysts at UBS Global Wealth Management still expect the pair to rise to 1.3500 by the end of this year. On the other hand, some experts are more cautious in their forecasts, given the growing risks of a "hard" Brexit and the unlikely compromise between the UK and the EU.
The current situation has an extremely negative impact on the dynamics of the pound, turning it into a "falling knife" or rapid drop, as Viraj Patel, the chief currency strategist at Arkera, simply put it. The expert recalls how many investors were hurt by trading on the pound, who hardly recovered after financial problems. He draws attention to the volatility of the GBP/USD pair, which is strengthening amid Brexit issues.
It should be recalled that British authorities went into conflict with the European bloc, confirming their readiness to violate international law in a number of points. This mainly concerns the part of the EU exit agreement that regulates trade with Northern Ireland. Experts fear that such actions could let the pound fall, although it is trying to stay afloat. At the moment, it lost to the US currency, despite reaching the annual high in early September 2020.
However, many investors, fearing negative consequences, avoid the pound. This is caused not only by problems with Brexit, but also by disappointing macro statistics. According to experts, the key macroeconomic indicators in Great Britain look much worse than the general European ones. In the second quarter of 2020, the country recorded a large-scale decline in GDP (by 20.4%). Experts say that this is much higher than in other large economies. The losses of the British economy are twice as high as in the economies of Germany and the United States, and this does not add confidence to the pound. As a result, investors prefer not to take risks, as trading the pound faces unpredictable results.
Analysts are surprised by the relative stability of the pound, which is perceived as nonsense in the current situation. Many attribute this perseverance to political manipulation linked to the UK's current strategy. A number of experts consider the position of the British authorities a bluff, which they had to go to in order to get more privileges from the European bloc.
On the other hand, the controversy between London and Brussels over a no-trade exit is not yet done, although experts consider them unproductive, as such a scenario guarantees devastating consequences for the British economy. However, if the United Kingdom finally abandons the deal, it will be hard times for the owners of the pound. In such a situation, the pound will bring a number of unpleasant surprises, which will be implemented until the end of the year. If such a scenario is considered, analysts expect a grand collapse in the GBP, which has not happened in the last few years. Experts warn that it is capable of overshadowing any losses in the event of a full-blown "hard" Brexit.
According to experts, the difficulties with the UK's transition to a new economic track against the background of leaving the EU cause "wounds" to the pound, from which it then recovers hard. However, the pound is not as simple as it seems: it can turn a "sharp edge" on the economy, and inexperienced investors can get hurt if they mishandle it. No wonder currency strategists compare the pound to a double-edged sword or "falling knife", emphasizing its complexity and unpredictability.
