The pound rises as UK bids goodbye to EU - but experts say to brace for an up to 7% drop if trade talks falter

FILE PHOTO: A trader works on the floor of the New York Stock Exchange shortly after the opening bell in New York, U.S., January 24, 2020.  REUTERS/Lucas Jackson/File Photo

Reuters

All eyes are on the pound on Britain's official Brexit day

  • The UK is set to leave the European Union at 11:00 p.m. London time this evening.
  • Sterling is trading slightly higher at $1.31 against the greenback.
  • However, analysts say this could also be due to the Bank of England's decision to hold interest rates on Thursday.
  • Analysts told Business Insider that if the trade negotiations with the EU succeed, sterling could end the year near $1.38.
  • However, the currency could fall back to $1.24 in case of a failed deal.
  • Visit Business Insider's homepage for more stories.
  • Watch the pound trade live.

The British pound is trading slightly higher as Britain gets ready to leave the European Union tonight.

Business Insider spoke to a number of analysts and currency experts who see the currency hitting close to $1.40 by the end of the year. Advertisement

After three and a half years of negotiations and political uncertainty, Brexit is set to take place at 11:00 p.m. this evening London time. While pro-Brexit campaigners will be busy celebrating Britain's exit from the EU, traders and analysts will be busy watching the pound.

However, a number of analysts told Business Insider that the initial reaction to the pound may be quite muted since the currency market has already priced in the exit. What comes next is the trade negotiations with the EU and any uncertainty on that front could see the pound falling in the longer-term.

"A 0.35% rise to $1.3139 puts the currency almost back to where it was at the start of the year, but still some way short of the $1.3335 level seen just after the general election result in December," Russ Mould, investment director at AJ Bell, said in a research note on Friday.
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The British pound has had a roller-coaster ride since the UK voted to leave the EU on June 23, 2016. The currency plunged from the highs of $1.50 to a 31-year low of $1.32 on the night of referendum and continues to trade 12% lower since then.

Some analysts also said that the slight rise in sterling on Friday is on the back of a hawkish Bank of England rate hold on Thursday and the year 2020 could be positive for sterling. "2020 will be an opportunity for the investor community to begin building sterling longs, in light of what could be a favourable turn in sentiment as the UK close the chapter on Brexit and look forward to a renewed future," Bether Loh, macro strategist at ThinkMarkets told Business Insider. Advertisement

A close eye on March 3

While the UK continues to remain a member of the single market and customs union till the end of the year, the uncertainty now remains whether the two sides will be able to sign an agreement on the next steps. Investors will be keeping a close eye on March 3, when the UK and EU start their trade talks.

"Sentiment on the pound could sour quickly if negotiations between the UK and EU falter once they get underway. Indeed, traders should be prepared for a troubled, rocky path for the talks and therefore expect significant headline risk for the pound in the coming months."

"There remains the threat of no deal and investors will be made acutely aware of this as the year progress - coming to potential mini-climax in June, when the two sides will need to be confident of agreement in time for Christmas," Neil Wilson, chief markets analyst at Markets.com said in his morning note.Advertisement

Meanwhile, Jeremy Stretch head of G10 FX at CIBC said optimism in regards to trade deal needs to be kept in context.

"For the year as a whole we do assume a higher value of Sterling by year end, but the near term outlook could prove challenging. We anticipate that sterling will end the year at $1.38 but the gain is at least partly by virtue of a lower USD," Stretch said.

What happens if negotiations fail?

"I assume the negotiations will not fail, but rather we end up with something akin to the US and China deal, namely a phase 1 deal sealed in the time line with the thornier issues kicked down the road," Stretch said.Advertisement

He, however, warned that if trade negotiations fail and the UK ends up with a delayed hard exit "we would look for GBP USD to drop 5% to 7% taking us back towards $1.24."

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