Future scenario EUR GBP – Brexit update

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Prime Minister Boris Johnson promised that he would be leaving the EU by October 31st, however, they were just granted a 3 month delay for the U.K. to depart from the bloc. The newest extension has taken a hit on Johnson’s credibility due to him saying he would “rather be dead in a ditch” than have another extension past the October 31st deadline. Johnson was also quoted saying the UK would depart the European Union on October 31 and that it would take place, “no ifs, no buts”.

This extension led PM Johnson to call for early elections in an attempt to gain a majority in parliament and pass his deal through. PM Johnson is taking a gamble because if this election fails it could lead to another extension, a second referendum, of Johnson’s resignation. There is also the risk that instead of gaining a majority of seats, Johnson looses the support of the people in parliament that he currently has. With the election on December 12th, Johnson hopes to break the impasse that has kept his deal from being passed through parliament. PM Johnson faces his strongest opposition from the Labour Party leader Jeremy Corbyn.

If Britain leaves the EU without a deal protecting trade, carmakers are worried about their costs increasing by billions and potentially millions losing their job. Without a deal, there is a risk of destroying one of the main aspects of Britain’s economy by undermining competitiveness and causing serve damage. Prime Minister Johnson deciding to exit the EU bloc without a deal would effectively end a tariff-free trade deal with a market that makes up 57% of British car exports. Additionally, Northern Ireland’s farms will be effected by potential problems crossing the border with livestock and trading with other farmers on the other side of the border. Leaving without a deal will negatively effect the GDP growth rate by between 3.5% and 8.7%.

The Decision for Great Britain to exit the European Union comes at a great cost to Britain’s economy and its citizens. Although Brexit comes at a huge price, lawmakers and citizens of Great Britain seem to be inclined that its future benefits out way the short term costs. If Great Britain is able to negotiate a deal with the European Union, Brexit is expected to cost the economy approximately 2.3-7% of its GDP growth over the next 15 years, with studies leaning towards the larger percentage. This translates to up to 130 billion pounds in lost GDP growth. This loss can be calculated on a per person basis that would accumulate to people being 2,250 pounds poorer through 2034. These estimates come from an independent research group and are worse then Theresa May’s deal which was estimated to have costed just 1.9-5.5% of GDP growth.

A Brexit deal or no deal scenario could greatly affect the price of the British Pound. Currently, most analysts, newspapers, and news agency’s are reporting an extremely low likelihood that Brexit would persist without a deal. Because of this if Brexit did indeed pass without a deal, it could have a grave negative impact on the British Pound, as it would take people by surprise.

The Euro Area’s manufacturing PMI rose slightly this month from 45.7 to 45.9, meaning the economy is still in a retraction but shows signs of growth. The United Kingdom’s manufacturing PMI is outperforming Europes and has risen to 49.6 this month, up from 48.3 the last month. This represents that market conditions in the UK are expanding slightly.

 

Over the course of the past year, the Euro/ GBP exchange rate has fluctuated between a low of 0.8506 in April of 2019 and a high between 0.9325 in October of 2019. Over the course of the past month, the Euro/ GBP exchange rate fluctuated between a low of 0.8582 on October 21 and a high of 0.9013 on October 10.

 

Ekuota forecasts, based on proprietary statistical models, for the end of the 2019 predict a range between 0.833 and 0.909. The expected average is 0.867. Hedging future pound inflows for the end of 2019 has a good efficiency: 52% at current forward price.

 

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