Brexit now dominates almost every headline as we move ever closer the realisation of the political movement to remove the UK from the European Union. This highly charged and poignant moment brings with it huge potential impact on the currency markets and the following is intended to outline the key dates, events and possible price implications. 

Since the UK voted to leave the European Union on 23thJune 2016, financial markets have been thrown into turmoil, based almost entirely on emotion and political brinkmanship. 

The perceived value of the pound has become a major indicator of market sentiment and a reflection of the ebb and flow of the Brexit negotiations themselves. This was reflected in 2016 when the referendum result saw the pound plummet to a 31-year low against the dollar overnight as the fear of the unknown spooked investors. Two years down the line, and with little clear progress in negotiations, Sterling has struggled to recover. 

The pound was hit again this summer as concerns that the UK could be leaving the European Union without a deal increased. Since April Cable has fell from 1.4400 to 1.2700 but recovered to 1.3100 in recent trade thanks to some encouraging comments from the European Union’s Chief Negotiator Michel Barnier. GBPEUR has followed a similar trend as the pair fell to fresh lows of 1.10 at the end of August ’18 but has found recent stability around 1.1200-1.1250. 

Some progress has been made but the finer details of key issues still need to be addressed. This includes how to avoid the return of a hard-border in Northern Ireland and the future trading relationship with the EU. Leaders will meet this Wednesday 19thand will attempt to progress the discussions but how the future trade relationship will look has barely been touched upon leaving UK businesses in the dark. 

EU leaders will also discuss holding an emergency summit in November as it is no longer expected that a deal can be reached by the original October summit deadline. 

Once the final terms of the withdrawal are settled the agreement will go to Parliament for a vote. Given the deep divide in the conservative party it’s looking unlikely that the deal will satisfy a majority with a number of Eurosceptics willing to reject any deal that keeps close trading ties with the EU. Prime Minister May will need to get as many of these sceptics onside in order to get the deal through Parliament. The Tory party conference provides her this opportunity at the end of the month but rebel MPs will not make the task easy. 

With all factors considered, most importantly the challenges May faces from her own party, calling the result on this is next to impossible as loyalties are tested and personal agendas advanced. The volatility we have witnessed in the FX market will continue until it is confirmed that a withdrawal agreement can be reached between the UK and European Union. If progress is made at this week’s summit this should help to diminish concerns of a no deal and we could see investors buy into the pound. 

The most recent warning from the Bank of England includes threats of increased inflation, rising unemployment, highs levels of net emigration and plummeting house prices if the UK leaves the EU with a chaotic no deal. The pound is also expected to fall to record lows against the dollar and the euro with major banks predicting $1.10 and €1.00 in a no deal scenario. 

All that being said arriving at a deal is far from out of the question and in reality, probably the preferred result for all parties concerned, both the UK and Europe. There continues to be structural and political issues internally within Europe that will be best addressed by a speedy and fair conclusion to Brexit. It would minimise impact on both sides when recovery is still very much and the forefront of any economic policy so there is, on our part, a logic to Brexit being pushed ahead in a coordinated and managed way. Such moves would give renewed strength to Sterling and Euro and we would expect to see pricingrise to €1.1600, the high of the year, depending on how favourable the terms are for the UK. 

Against the dollar, a break above 1.3320 would suggest further upside to 1.3520. These may be useful target levels for GBP sellers for the next 8 months. We would suggest to stagger market orders to the upside to take advantage of a strengthening pound. 

If you have foreign exchange requirements that stretch beyond 2018 it is critical to manage your exposure and factor in the worst case scenario. Please contact your Account Manager or the trading department if you wish to discuss a hedging strategy with the team.

The UK is scheduled to leave the European Union on 29thMarch 2019 at 23:00 London time. 

Timeline - Key Dates 

19th& 20thSeptember 2018– Informal European Council meeting, Brexit to be discussed 

30thSeptember to 3rdOctober 2018– Conservative Party Conference 

18thOctober 2018– The EU summit described as the deadline for the withdrawal agreement 

November 2019– Emergency EU summit to be confirmed 

29thMarch 2019– The UK is scheduled to leave the European Union at 23:00 London time 

31stDecember 2020– end of the transition period