Brexit: Euro-GPB outlook

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UK Parliament will be voting on December 11 to decide whether or not to ratify the deal that Prime Minister Theresa May brought back from Brussels. This plan has been widely opposed, and Parliament is expected kill the deal; the question is no longer whether or not the deal will be rejected, but by howmany votes. May’s key argument is that if her deal is rejected there may be no Brexit at all. If the May loses her battle to pass the deal by a landslide, there is a possibility that she may even resign.

As May’s debate to get her Brexit deal through Parliament begins, there is a looming possibility of a No-Deal Brexit. As a result, the British government has been initiating No-Deal planning, which includes issuing thorough instructions to 145,000 British businesses on how to import and export in case of no deal. No deal would mean customs checks and delays at the borders, which for many businesses would cause significant disruptions in their operations. How businesses and firms prepare for the possibility of a No-Deal Brexit will determine the overall impact on the UK’s economy. Up until recently, the government delayed releasing this kind of advice because ministers were concerned about being accused of “fear-mongering.”

If Parliament rejects May’s deal next week, which is expected, it will be in the position to decide what Britains “plan B” will be. They could either strike a new deal with the EU lawmakers orhold a second referendum to overturn the outcome of the first. Tory lawmaker Dominic Grieve said,“Parliament must now take back control and then give the final decision back to the public because, inthe end, only the people can sort this out.”

If a deal is agreed on and accepted, the UK will make an orderly exit from the EU. On the other hand, a No-Deal Brexit would be chaotic and the BOE and the Treasury have warned that it would cause immediate and severe damage to Britain’s economy. There is, however, a third option that was just aided by EU lawmakers. The European Court of Justice released an opinion that, if the U.K. held a second referendum, they could unilaterally stop the process of leaving the EU. This opens a back-door for theU.K. to stop Brexit in its tracks if Parliament does not approve May’s deal by March 29th, preventing achaotic economic disruption.

Despite the uncertainty surrounding the future of the UK, companies like Aberdeen Standard Investments, Allianz Global Investors and Investec Asset Management, which altogether manage over €1.3 trillion, are maintaining long positions on sterling. These money managers anticipate that Parliament will step in to come up with a final Brexit deal. Allianz money manager, Kacper Brzezniak, believes that a no-deal Brexit will be avoided with Parliament taking back control. Given that many of May’s own Conservative Party Members are against her deal, it is unlikely that it will pass with 320 votes next week.

Figure: eKuota Scenario Forecast (March 31st) – EUR-GBP Exchange Rate

The uncertainty of the Brexit situation is very high, Ekuota’s scenario forecasted a range of 0.853 – 0.951 at the end of March 2019.

Ekuota expects the pound-euro exchange, which is currently trading around 0,893, to fall to 0,95 if the deal is rejected.

The Euro-GBP FX forward at the same date is 0.8904. In case of a no deal scenario, the Pound will depreciate further and doing a forward hedge for future Pound inflows is a good strategy.

Written by: Gabriella Sullo and Robert Biggar

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