Dubai: The British pound is likely to hold steady for the moment as the UK and European Union finally sign off on a proper exit.
“Pound has held at around 1.30 to the dollar 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. Even then, all eyes will be on the currency and whether the Bank of England adjusts its rate policy after the split.
The value of the pound has moved back and forth on the heels of any Brexit-related news in the last three-and-a-half years. 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 late December - which delivered a decisive win for Prime Minister Johnson - caused the pound to rally initially, because investors were encouraged the pro-Brexit majority would lead to a quick and business-friendly exit from the EU.
Bank of England holds the key
Currently, the consensus among analysts is the value of the pound will remain unchanged in the days after the January 31 Brexit deadline. However, key to the near-term outlook will be the outcome of any interest rate decision announced by Bank of England, which is meeting mid-day tomorrow. This does offer potential for heightened currency volatility.
The central bank will be offering communication and fresh economic forecasts, which will have a bearing on the markets and also offer an insight 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 the central bank will remain on hold at 0.75 per cent despite some dovish noise from 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.” (Bank of England governor Mark Carney has been credited with providing a deft hand in the tumultuous years after the 2016 Brexit referendum vote.)
Buy into volatility
The Brexit saga is far from over, though, 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.
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 at Emirates NBD 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 pound against the UAE dirham has slid about 1 per cent during the last seven days, hovering at about Dh4.77. Analysts said the current weakness of pound 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 international, economic growth.