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Pound to Suffer Brexit Double Whammy?

The pound, still reeling from the fallout following the Brexit referendum, could be put under even more pressure should Britain exit the European Union without a trade deal.

 

According to one market analyst, Fiona Cincotta, “The day after the UK voted for Brexit, the pound suffered the biggest single day loss for a G10 currency in recorded history. The pound could potentially replicate this decline.”

 

The British pound sank to almost $1.18 to the dollar in the wake of the shock referendum result in 2016. The last two years have seen the currency claw back some of its losses, however, investor concerns over a deal-less split have seen GBP touch $1.27 in recent sessions.

 

Investec’s George Brown is optimistic about a trade deal being struck before the March deadline, but warns of the pound falling to as low as $1.10 if Theresa May’s government and Eurozone leaders are unable to come to an agreement.

 

Glacially slow negotiations have increased concerns that Britain could exit the E.U. without even so much as a transitional deal in place that would allow the island nation to remain in the customs union and single market.

 

While a plummeting pound would have a detrimental impact on imports, industries that require “just in time” deliveries, such as retailers and automobile manufacturers, could see their supply chains put under tremendous strain.

 

Impact on Equities

The good news is that UK stocks are likely to be more resilient than the currency if no deal is agreed, as a weak pound would attract overseas investors to British equities, which in turn would help to stabilise prices.

 

Indeed, many of the FTSE 100’s biggest companies are mining and oil operations which generate most of their income in currencies other than the British pound. Further, once these overseas sales are converted back into pounds, these companies’ earnings should receive a welcome boost.
In the view of one analyst, “The stock market is less susceptible to a no-deal outcome than the pound. While there may be a knee jerk reaction lower of 2% to 3%, it is unlikely to experience a large loss.”

 

But it’s not all good news for UK equities.

 

According to Jonathan Davies, head of currency strategy at UBS Asset Management, “Companies which service the domestic market and are most reliant on imports would likely be hardest hit in a no-deal Brexit”.

 

And in the view of Euromonitor International’s Ugne Saltenyte, “Industry-wise, soft drinks, alcoholic drinks and packaged food industries are the most sensitive to the impact of Brexit”.

 

Impact on the Bond Market

A no-deal could also have a big impact on UK bonds, according to John Higgins, chief markets economist at Capital Economics, who believes that if Britain and the E.U. are unable to strike a deal, 10-year UK bond yields could fall to just 1% as demand for the safe haven asset rises.

 

“The yield fell from nearly 1.4% on the eve of the vote to 0.6% in less than two months,” he said. “So a drop to 1% would not seem out of the question.”

 

 

Disclaimer:
This article is for educational and informative purposes only and should not be considered as investment or trading advice.

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