British pound under pressure as chances of a no-deal Brexit rise
The British pound declined today as the third round of Brexit talks ended with little progress. The pound index, which measures the performance of the sterling against a basket of currencies declined by more than 0.85%. It declined by almost 1 per cent against the US dollar and more than 1.10 per cent against the euro.
What happened?
The UK left the European Union in January this year and entered-into an eleven-month transition period. During this period, the country would continue doing business with the European Union without any barriers. At the same time, the two sides would negotiate, with the goal of creating a mutually agreeable trade deal.
According to the transition documents, the UK can ask for an extension of the transition period. But it has until June 30th to do this. If it fails, the two sides must work hard to reach an agreement before the end of the year. If no agreement is reached, the UK will continue doing business with the EU but under the rules set by the World Trade Organisation (WTO).
There are two main challenges to the ongoing negotiations. First, time is really limited. Experts believe that a deal of this magnitude should be negotiated within several years. Worse, the coronavirus pandemic has limited travel, which means that the talks are being held virtually.
Second, the two sides are in incredible pressure. The UK side wants a deal that will give it free trade with limited EU bureaucracy. On the other hand, the EU wants a deal that will protect its business from unfair competition from UK companies.
Key differences between the UK and the EU
A few differences have emerged between the EU and the UK. First, the UK has insisted that it is negotiating with an equal partner. According to Michel Barnier, the chief EU negotiator, this is wishful thinking because the UK has a population of 66 million while the EU has more than 400 million people.
Second, the UK has said that it wants a free trade agreement that gives it the ability to make its own regulations. It calls for a Canadian-style agreement. On the other hand, the EU has argued against a Canadian-style deal because of the geographical location and the volume of trade. While the EU does trade worth about €72 billion with Canada, its trade with the UK is worth more than £650 billion a year. Therefore, the EU argues that giving the UK autonomy to set its own rules would disadvantage its own firms.
Third, fisheries have been a major source of disagreement between the two. The UK wants to control the people who can fish on her waters. The EU disagrees because most of its fishermen catch most of their fish in UK waters.
What next for the British pound?
The next few weeks will be volatile for the British pound because uncertainty about Brexit will increase. That is because statistics from the government show that leaving the UK without a deal would have a negative impact on the UK economy. A recent study by the United Nations found that the UK would lose more than $32 billion in case of a no-deal Brexit. Another study by the Bank of England said that such a scenario would lead to a 5.5 per cent hit in the GDP. It would also push the rate of unemployment to above 7 per cent (this projection was before the Covid-19).
Therefore, there is a possibility that a disorderly exit would lead to a sharp decline in the British pound. That is possibly the reason why many hedge funds have shorted the British pound. According to the latest data by CFTC, short bets against the sterling have reached the highest level this year. By shorting the currency, the funds aim to benefit when it slides.
Are you thinking of sending money? At Moneytransfers, we can help you find the lowest payment provider. We do this by comparing hundreds of payment companies and letting you select the most efficient.
