Brexit Uncertainty Pounds to Continue in the Near Future

Published September 22nd, 2019 - 07:00 GMT
It is highly likely that the currency can top the level of 1.26 against the dollar.
It is highly likely that the currency can top the level of 1.26 against the dollar. (Shutterstock)
Highlights
Sterling will rally around 6 per cent against the euro if Britain leaves the European Union with a deal.

Volatility in the British pound is set to continue in the near future until the dust settles around Britain's exit from the European Union.


Analysts believe that the currency could sink to parity against the greenback and hit a high of 1.35 (4.96 versus the dirham), depending on negotiations between the UK and the EU.

Naeem Aslam, chief market analyst at London-based TF Global Markets, said in the event of a no-deal Brexit, the pound and dollar could see parity but that risk has faded to a larger extent after a significant change in stance from European lawmakers last week.

"It is highly likely that the currency can top the level of 1.26 against the dollar. Overall, it is safe to say that the momentum is strong for Sterling and the current change in the EU narrative has opened the door for a major rally," he said.

European Commission president Jean-Claude Juncker said on Thursday he was confident a Brexit deal will get passed, triggering a brief rally in sterling.

A parity of the pound and dollar means the former will lose nearly 20 per cent to trade at 3.67 against the UAE dirham.

"If we continue to see a strong possibility of a deal happening with the EU, it will be a no brainer for sterling to cross well about the level of 1.35 against the dollar during this month. On the other side, if a no-deal Brexit becomes a reality, then bears will come back with a vengeance. This is where the conversation of parity becomes intriguing," Aslam said.

Adeeb Ahamed, managing director of Lulu Financial Group, said the delay in Brexit, China and the US agreeing to meet for trade negotiations and easing of tensions in Hong Kong have allowed not only sterling but all other major currencies to bounce back considerably, with the stock markets too registering good gains.

"Traders along with medium- and long-term investors would not venture into the market unless a concrete plan of action is drawn with relation to Brexit," he said.

The pound was trading at 1.247 versus the greenback (4.582 against the dirham) on Friday. Following a see-saw trade witnessed during last week, sterling has lost 0.16 per cent after gaining nearly 0.55 per cent; it has gained 2.88 per cent in the last one month. But the pound has weakened by 4.36 per cent in the last one year. It has lost nearly 15.56 per cent since the Brexit was announced on June 23, 2016.

"As of now, sterling might move sideways for quite some time. We believe that it can move between 1.2130 and 1.2360 against the dollar. In a worst-case scenario, sterling could sink to 1.1780 and otherwise, it can scale to 1.2550 in the near future," Ahamed told Khaleej Times.

British Prime Minister Boris Johnson had said that Britain would leave Europe with or without deal on October 31. But an opposition bill which would force Johnson to ask the EU for an extension to Britain's departure to avoid an October 31 exit without a transition deal was approved by parliament's appointed upper chamber, the House of Lords.

Han San, market analyst at FXTM, expects the British currency could promptly surpass 1.30 against the dollar (4.772 against the dirham) should the UK and EU reach a Brexit deal, depending on the exact details of the agreement, while a no-deal Brexit is expected to send ot towards 1.15 (4.222 versus the dirham).

"However, the path to any of these key levels will be anything but straightforward, as sterling remains susceptible to UK political risks in the interim. Should the Brexit impasse drag on longer, that should keep sterling subdued around the 1.20 levels," San said.

As a result of Brexit uncertainty and global trade war concerns, gold has also been a major beneficiary from the risk-off mode in global markets. San sees more upside potential in the price of yellow metal in the coming months.

A survey by Reuters had revealed that sterling will rally around 6 per cent against the euro if Britain leaves the European Union with a deal.

"The pound should rebound after October 31, assuming that either a no-deal Brexit is somehow averted, or it is 'managed' successfully enough via a stopgap, stand-still trading arrangement with the EU that minimises economic dislocation," said Everett Brown at IDEAglobal.


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