Hot and Heavy Negotiations Over Brexit Cause Volatility In The Pound

Hot and Heavy Negotiations Over Brexit Cause Volatility In The Pound
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The deadline for Brexit is approaching fast. On March 29, the UK will officially become a non-member of the European Union with or without a divorce agreement. In June 2016, the UK voted to exit the EU. Over two and one-half years later, leaders in London and Brussels have yet to agree on the final separation terms.

The British Parliament has held Prime Minister Theresa May’s feet to the fire on Brexit. While the body recent gave the leader a vote of confidence by a slim margin, they voted overwhelmingly against her Brexit plan that the EU had approved. Last Thursday, the Parliament handed Prime Minister May another in a long series of defeats when they vote against extending the deadline from the March 29 date to allow more time for negotiations.

The pound versus the US dollar currency relationship dropped from $1.50 to $1.20 in the aftermath of the Brexit referendum. After a bit of optimism over a deal in early 2018 that took the pound to over $1.40 against the dollar, it slipped below $1.30 at the end of last year when the Parliament rejected a deal. The pound found a bottom at $1.2512 on January 25 but recovered to $1.3252 on January the back of optimism that the upcoming deadline would force an eleventh-hour agreement.  Since then, it had been all downhill for the pound which hit a low at $1.2791 on Valentine’s Day as the currency market showed no love for the British currency in the wake of Parliament’s refusal to extend the looming deadline.

One of the most significant issues facing both sides is the treatment of the UK’s border with Ireland which will remain a member of the European Union. Over recent days, the potential of a compromise that would be acceptable to both the UK and Parliament caused the pound to recover to almost the $1.31 level against the dollar. Ireland is a central focus when it comes to the Brexit issue.  Source: CQG

As the daily chart of the British pound versus the US dollar highlights, the no-vote from Parliament sent the UK currency to its lowest level since mid-January, but the potential for a compromise lifted the pound since Friday.

Expect the volatility of the pound-dollar and pound-euro currency relationships to increase over the coming weeks as the deadline comes closer. March 29, 2019, remains a line in the sand for Brexit, and it is looking as if negotiations will continue, perhaps until the final second.

I continue to believe that the UK Parliament and the European Union will compromise on a deal that avoids a hard exit at the end of March. Moreover, that agreement is likely to lift the value of the pound. We have seen that the pound has appreciated during periods of optimism over a deal and dropped when pessimism takes over.

There is lots of volatility for the pound ahead over the rest of February and throughout March that is likely to intensify. A deal will lift the value of the pound, which could be the high odds play as the alternative would be more than troublesome for both the UK and EU.

 

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