Pound Could Collapse If Britain Fails To Close Brexit Trade Deal
British pound may fall 10% or more if UK does not close trade deal with European Union this weekend.
Currency traders, who once assumed the deal would be completed before the Brexit transition period ends by January 1, will nervously watch developments for the next 72 hours after the UK Prime Minister Boris Johnson (Boris Johnson) warned late Thursday that the proposed terms of the deal did not work in any way for the United Kingdom.
Johnson traveled to Brussels on Wednesday for dinner with the President of the European Commission Ursula von der Leyen (Ursula von der Leyen). But the latest attempt failed to break through on sensitive issues, including fishing rights, government aid to companies, and dispute resolution. Officials returned to the negotiating table again before the agreed deadline this Sunday.
«The binary outcome [deal or no deal] is teetering on the edge of the knife, potentially causing the pound to jump wildly as the Brexit saga comes to a close», – said Han Tang (Han Tan), FXTM Market Analyst, in a research note. He added that the fact that the pound is not yet «capitulated» against the dollar, suggests there is still «hidden hope» that the deal will be concluded.
The pound was trading around $ 1.35 earlier this month when a deal between the UK and its largest export market looked more likely. Analysts warn that the currency could quickly drop below $ 1.20 if it becomes clear that the deal is no longer possible. The pound fell 0.6% on Friday to trade just above $ 1.32 as hopes for a deal began to fade.
Jordan Rochester (Jordan Rochester), a strategist at Nomura, said the currency could weaken further after an initial drop to $ 1.20 as UK trade adjusts to life outside of the vast 450 million EU market.
A drop below $ 1.20 would push the pound to its lowest level since the sudden collapse in late 2016. It will also end the sharp drop in the currency, which traded above $ 1.45 in the months leading up to the June 2016 Brexit referendum..
A weaker pound could help UK exporters cope with the Brexit shock, but it will drive up the prices that UK consumers pay for food and other imports.
There is very little time now. Johnson said that he instructed his negotiators to do «the extra mile» looking for a deal ahead of Sunday’s meeting, but negotiations on the same set of issues have collapsed for months, and both sides, failing to reach a deal, seem to have chosen to stand their ground despite the huge economic costs, especially for the United Kingdom.
Johnson said Thursday that he instructed his cabinet to prepare for the failure of the talks, and the European Union has unveiled plans to keep its borders open to commercial planes, trains and trucks. Johnson and von der Leyen said earlier this week that a decision will be made by the end of this weekend, but analysts suggested another extension might be possible if significant progress is made. The deadline for reaching an agreement is December 31, the expiration date of the agreements that have provided the UK with all the trade and economic benefits of EU membership following its exit in January 2020.
How much does Brexit cost?
Leaving the European Union means higher costs for UK companies under all circumstances, but leaving without a new trade agreement could be disastrous. Britain could trade with its largest export market on the terms of the World Trade Organization (WTO, WTO), subjecting the movement of goods and services to tariffs and other barriers.
The UK’s Office of Fiscal Responsibility (OBR), which makes economic forecasts for the government, said in November that even if London and Brussels can strike a deal, their new trade relationship is expected to result in a long-term loss of production. roughly in the region of about 4% compared to the UK, which remained in the fold of the European Union.
But without a deal, Brexit will cut production another 2% in 2021, or about £ 40bn ($ 53bn), and leave more than 300,000 people unemployed by the second half of next year, according to OBR forecast..
The United Kingdom is already facing a growing employment crisis and is experiencing its worst recession in more than 300 years due to the coronavirus pandemic. Last month Governor of the Bank of England Andrew Bailey (Andrew Bailey) said the economic negative impact of an unconditional Brexit will be worse in the long term than a pandemic.
British Pound Could Drop 10% If No Brexit Deal, Says Wraith
«It takes much longer for what I call the real side of the economy to adjust to changing conditions of openness and changing trading profiles», – he said while testifying before the parliamentary committee.