Pound steadies as Britain exits the EU, but volatility seen ahead

Dubai: With the UK set to leave the EU after years of wrangling, analysts expected the British pound will hold steady in the near-term after the momentous departure — but volatility may not be that far ahead.

The value of the pound has historically moved back and forth on the heels of any Brexit-related news. While a stronger pound has tracked the likelihood of a clean and business friendly break from Europe, a weaker pound has been linked to a chaotic Brexit or no-deal Brexit.

The general election result last month caused the pound to rally because investors were encouraged that a strong pro-Brexit Conservative majority would lead to a quick and business-friendly exit from the EU.

Short-term stability

Currently, the consensus among experts is the value of the pound will remain unchanged in the days after the January 31 Brexit deadline. However, key to the pound’s near-term outlook will be the outcome of the midday interest rate decision announced at the Bank of England — an outcome which offers the potential for heightened currency volatility.

“Sterling has held at around 1.30 for the last few trading sessions but any dip may be muted given greater certainty that Brexit will indeed occur on January 31,” said Daniel Marc Richards, MENA Economist at Emirates NBD, but added that all eyes will be on the pound and whether the Bank of England adjusts its rate policy.

The central bank will be offering communication and fresh economic forecasts which will have a bearing on the outlook and markets will therefore be given the chance to get a sense of what the regulator might do in future.

“The (Bank of England) decision is on a knife-edge given the mixed data we have seen over the past month and we expect that the central bank will remain on hold at 0.75 per cent despite some dovish noise from MPC members,” Richards added. “However, the chance of chair Mark Carney deciding to go out with a bang for his last meeting in charge cannot be discounted.”

Buy into volatility

The Brexit saga is far from over, however, given that negotiators have just 11 months to reach a trade deal in order to keep to the current timetable which sets the end of the transition period at the close of the year,” said Daniel Marc Richards, MENA Economist at Emirates NBD.

As Britain shifts its focus to the transition at 2300 GMT on Friday, the move will not be easy as the EU continues to take a hard line ahead of UK-EU trade talks that are due to begin on March 3.

A number of issues need to be resolved by December 31 and Richards added that fishing rights and access to financial markets look set to be among the “early clashes.”

Any market volatility stemming from any likely friction between the UK and the EU concerning the deal could create buying opportunities for the pound sterling, wrote Tan Teck Leng from UBS Global Wealth Management.

The British pound against the UAE dirham has slid about 1 per cent during the last seven days, hovering at about 4.77. Analysts said the current weakness is due largely to global “risk-off” sentiment on concerns that the coronavirus outbreak that began in China could have a negative impact on Chinese, and potentially global, economic growth.