Pound Flat Against Euro Over Potentially Catastrophic No-Deal Brexit

Alan Penny

25 June 2019

3 min read

Brexit concept

Concerns over how a no-deal Brexit could affect the entire U.K. economy resulted in the EUR/GBP remaining flat, with the pair trading at 0.8951 on Tuesday.

Though many have spoken out regarding the potentially disastrous consequences of a no-deal Brexit, this time it was the U.K. car industry that shared a dire view of the future.

The Society of Motor Manufacturers and Traders stated that a no-deal Brexit would have seismic effects as it could lead to increases in tariffs of billions of pounds. The additional tariffs could completely derail the industry.

The SMMT warned that these additional tariffs would significantly affect “consumer choice and affordability.”

Boris Johnson told the BBC that he didn’t “believe for a moment” that the U.K. would leave the European Union without a deal.

However, he did state he would require the EU’s cooperation, and if he didn’t get it, he was willing to withdraw without a deal.

It should be noted that the new leader of the Conservative Party and British prime minister will only be declared on the 22nd of July, after a month-long competition between Boris Johnson and Jeremy Hunt.

Pound Forecasted to Weaken Further

Analysts expect the pound to fall to levels it hasn’t seen since 2017 as Brexit concerns succeed in overshadowing even a dovish outlook from the European Central Bank.

Thus, the pound is expected to be trading around £0.92 for one euro by the end of the year. This would equate to a decline of approximately 3%. The rate is one that the pound hasn’t experienced in almost two years, according to JPMorgan Chase & Co.

This drop also indicates precisely how skeptical the market is regarding the Bank of England’s statements that they might have to hike rates if the economy achieves the forecasted results.

In fact, considering the global slowdown in momentum, the market feels it’s far more likely that the Bank of England will have to cut rates next year.

Timothy Graf, State Street Bank & Trust’ head of EMEA strategy for Europe, stated that the pound still has room to slide further. He further said that the Bank of England was taking a far too optimistic stance, especially when considering that everyone except for Norway was discussing the potential of easing their monetary policies.

The pound declined around 4% against the euro since the beginning of April. The market has clearly been shifting over to the euro and continues to do so, indicating they expect the common currency to experience more gains against the pound.

Pound Fails to Rally Against USD Even After Drop in US Home Sales

The market continued to lose faith in the U.S. economy’s health today after the figures for new home sales for May dropped by 7.8%.

The consumer confidence index also declined, dropping to 121.5 from 134.1. This figure suggests that the U.S. economy will continue to weaken as consumer spending will reduce potential growth in Q2.

While this weakened the USD against other major currencies, it still held its own against the pound. The GBP/USD rose to 1.2780, but the pound was unable to maintain its gains and the rate drew back to 1.2705.

Clearly, the no-deal Brexit is of far greater concern than a lack of confidence in the U.S. economy’s near-future health.

The market is waiting for Jerome Powell’s speech, to be held later on today, which might see the U.S. dollar slide against other currencies depending on the position the Fed Chairman takes. It should be noted, though, that Powell continues to emphasize the Fed’s independence from political interests as President Donald Trump continues to disagree publicly with the U.S. monetary policy.

Written By
Alan Penny

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