The Brexit X-hour is rapidly approaching, and investors froze in anticipation. Boris Johnson made it clear that he expects to conclude a deal in the coming days. If it cannot be concluded by Thursday, it could mean leaving the EU without a deal. The pound, meanwhile, was relatively calm at the beginning of the day and continues to trade at highs with the dollar around the 1.30 mark. It should be noted that the outcome of the transaction will be important not only for the pound sterling but also for the markets in general.
So, what's blocking the deal? The reasons are the same. Britain wants to maintain access to the single market but does not want to comply with EU rules. It is not just extremely difficult, but impossible to reach an agreement in such conditions. Nevertheless, there is a chance for a compromise. This requires London to agree to comply with EU rules in key sectors within the agreed time frame. Then it will be possible to think about organizing joint committees to monitor these agreements.
If we talk about sectors that are not included in the deal, the transitional agreement must weaken the original impulse. This is due to the fact that economic growth is weakened on both sides. The new trade deal will be more limited than the current one, and both the EU and Britain can claim victory. Despite the approaching date of the transaction, it can break, and in the very last minutes.
At the moment, the pound has two scenarios for development: with or without a deal. If the parties manage to reach an agreement, the exchange rate for sterling may rise by about 5%, as the risks of economic shocks will disappear due to the lack of a deal.
In the event of a breakdown in negotiations, which may result in the absence of a deal, the pound will be seriously affected. In this case, it's rate is expected to fall by 10%.
During the daytime trading, the GBP / USD pair traded downward, breaking through the important level of 1.30.
As for EUR/GBP, the pair is likely to continue trading around the 0.90 mark until there is more clarity on the deal. When the deal becomes a reality, the euro should fall to 0.86. In the future, the growth of sterling against the euro will be limited, the EUR/GBP pair may trade around this mark for several months or even a year.
Almost everything is clear with the pound, in fact, it is more difficult to predict the behavior of the FTSE 100 index. There is a negative relationship between the currency and the British benchmark. There is speculation that weaker sterling increases the value of repatriated foreign income, and hence the underlying index. However, not everything is as simple as we would like: the relationship between the pound and the FTSE 100 is unstable. In practice, there is a negative correlation, there were also long periods when a direct relationship was observed.
As an example, consider the British referendum that took place four years ago. The FTSE 100 collapsed, then rose and went down again. The pound two weeks after a significant political event became cheaper by 12%, the FTSE gained 2%.
Now, when the economies of many countries are going through hard times due to the pandemic, this is not the time to argue and prove your position. Both Europe and the UK need this deal. A destructive outcome of the negotiations will have a negative effect on both sides and worsen the risk appetite of global investors. As a result, corporate and consumer sentiment will suffer, the period of economic weakness will continue, and commodity prices and interest rates will also fall.
Market players will have to look for other options to hedge their portfolios if there is no deal. This is a fallback scenario. The basic one is the existence of a trade agreement between Brussels and London. In this case, it will be the best time to buy UK securities.
