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Latest #IGForexChat Reveals How Brexit Negotiations Are Affecting the Forex Markets

How close is the UK to finalising a deal with the EU? Only Theresa May and Michel Barnier truly know the answer to that.

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Brexit
French noted that investment in UK assets and stocks is “waiting in the wings” to find out what those barriers will be. Pixabay

With the UK due to formally leave the European Union (EU) in less than six months, Brexit negotiations are reaching a nervous climax.  Hopes remain that the UK government will secure a deal with the EU by the end of the year, but what impact are the Brexit talks having on the forex markets? How far could the pound fall if there is no deal reached? Would the pound be affected by a vote of no-confidence within the Conservative Party and Prime Minister Theresa May being replaced?

The latest #IGForexChat outlined the potential ramifications of Brexit negotiations on forex markets. IG’s Sara Walker interviewed two leading forex experts, chief economist Simon French and market analyst Nicholas Cawley, to help forex traders understand the implications of a hard or soft exit from the EU.

If you don’t have time to watch the entire interview, here are the main talking points as to whether forex traders should buy or sell sterling in the markets in the coming months:

Brexit
May’s spokesperson said both the Prime Minister and the Brexit secretary, David Davis, said the government would be robust when the EU withdrawal bill returned to the House of Commons after completing its passage in the House of Lords. Pixabay
What will happen to the pound if we reach 31st March 2019 without a Brexit deal?

Nicholas Cawley insists that it is highly likely that the UK government will know if a Brexit deal can be reached by the end of the year. Cawley said there will undoubtedly be “clear signals” ahead of the EU’s December meeting as to whether a deal is achievable.

According to Simon French, the UK parliament will have an influential role if talks move into the New Year. French believes January will be a crucial month for parliament as the amendments within the UK’s withdrawal bill will need approval. If the majority of MPs cannot agree on the bill, they will have the right to propose a “meaningful vote”. French believes this vote could “ask the government to go back to the negotiating table” and attempt to “extend Article 50”.

French also believes it is unrealistic to expect the price of sterling to be priced on a hard Brexit “until midnight on March 29th”.

In a Tuesday radio interview International Trade Secretary Liam Fox said it was not acceptable for the unelected House of Lords to try to block the democratic will of the British people, who voted by a 52-48 margin in June, 2016 to leave the EU.
The Independent newspaper Tuesday night reported that May was preparing for a Brexit meeting with select cabinet ministers Wednesday at which they will try to come up with a joint position on post-withdrawal customs relations following rejection of Britain’s existing proposals. wikimedia commons
How far could the pound fall against USD and EUR in the event of no deal?

French pointed to historical analysis of previous peaks and troughs of sterling against the US dollar. The IMF bail-out of the UK in the 1970s and Lehman Brothers/Northern Rock in 2008 resulted in “20-25%” declines, leaving the pound in the “high teens” i.e. $1.17-$1.20 to the pound. French believes a hard Brexit is “no more material than those previous events” and, as such, the pound could experience a similar decline next March.

On the subject of whether the pound will end up in parity with the euro, Cawley was quick to dismiss those claims.

How will Brexit affect the pound during the transition period?

Cawley was quick to predict that, if an extension to the UK’s transition period after leaving the EU is agreed, “it will initially weaken sterling”. However, he suggested that an extension may prove useful to some business sectors that may need that time to “get their house in order”.

On the flip side, Simon French is “slightly more bullish” about the transition period. He believes the expected discussions about a free-trade agreement will eventually uncover “the materiality of what trade barriers will look like” between the UK and the EU. French noted that investment in UK assets and stocks is “waiting in the wings” to find out what those barriers will be. He believes that, once clarity is achieved in the “Treaty text”, it will be easier to price things correctly.

Brexit,  Image source: www.catholicherald.co.uk
Representational Image, Brexit.
Will the pound be affected by the replacement of Prime Minister Theresa May?

On the subject of the value of the pound being influenced by the departure of Theresa May as Prime Minister, Nicholas Cawley believes sterling “would take it quite well” and that the price “wouldn’t go down”.

Cawley was quick to temper that by saying it would ultimately depend on the “favourite” candidates to replace her. He said that the prospect of Boris Johnson would be “hated” by many in the markets, yet a more “progressive” candidate such as Sajid Javid would be viewed more positively.

Are further interest rate hikes likely from the Bank of England?

Nicholas Cawley believes there is “no reason to push interest rates up at the moment”, despite inflation reaching 2.4% this year. Furthermore, Cawley finds it hard to believe that the Bank of England would dare consider raising interest rates in the event of a hard Brexit.

Both Cawley and Simon French expect little to happen on the subject of interest rates until May 2019, when the Bank of England “may start giving some signals” based on the first quarterly inflation report after the UK leaves the EU on 31st March.

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Brexit (Representational IMage) Image source: The Street

Interestingly, French suggested that the Bank of England could yet consider a rate hike “as early as February” with the ECB’s rate policy seemingly rigid and President Trump reportedly wanting the Fed to “go at a slower rate”. French believes this would encourage investors to “buy into sterling”.

How close is the UK to finalising a deal with the EU? Only Theresa May and Michel Barnier truly know the answer to that. French noted that “the history of the EU negotiations” would suggest that the Brexit talks will inevitably “go down to the wire”. Whichever way the scales tip, the forex markets are sure to be a fascinating place to be in the coming months.

Next Story

Denmark Hopes to Set Example for World with Ambitious Scheme to Cut Carbon Emissions by 70%

To be honest, for the climate, even if we just close down our country tomorrow, it wouldn't help much

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Denmark, World, Scheme
FILE - Denmark's Climate and Energy Minister Dan Jorgensen speaks during an interview in Copenhagen, Denmark, Aug.16, 2019. VOA

Denmark’s official in charge of climate matters says his country hopes to set an example for the world with an ambitious scheme to cut carbon emissions by 70% in little more than a decade, but it has no illusions that it can have a meaningful impact on global warming by itself.

“To be honest, for the climate, even if we just close down our country tomorrow, it wouldn’t help much,” Dan Jørgensen, Denmark’s top climate and energy official, told VOA during a visit to Washington this week. “I guess you can argue: Does it really matter what you do?”

Jørgensen said Denmark accounts for just 0.1% of the world’s carbon emissions, a drop in the bucket compared with emissions from the largest polluters such as China, the United States and India. But he said, “The reason we do these things anyway is that if we succeed in doing that, then hopefully we’ll inspire others.”

Jørgensen, who will be in New York next week to promote his country’s climate agenda at the United Nations, said his country hopes to demonstrate that it can carry out a green transformation and still be competitive in the global marketplace. In the process, it expects to develop new technologies that “other countries can also use.”

Denmark, World, Scheme
People hold placards during the Global Climate Strike at Raadhuspladsen in Copenhagen, Denmark, Sept. 20, 2019. VOA

Stages of debate

According to Jørgensen, the climate debate in Denmark has gone through several stages since the issue started to enter the public’s consciousness about 15 or 20 years ago.

At that time, he said, some in Denmark still questioned how real climate change was and whether humans had anything to do with it. That was followed by a period in which the public by and large understood that climate change was real, but some remained reluctant to devote resources to the problem, concerned that efforts by Denmark alone would be futile.

Now, he said, most people agree on the nature of the problem. Looking out the window, “they see droughts, they see flooding, they see extreme weather phenomena,” he said. “We are also a nation that’s closely connected to Greenland,” one of the places where climate change is most evident in the form of melting glaciers.

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With that consensus, the debate has shifted to an energetic discussion about the best policy instruments to address the problem.

The issue so dominated Danish general elections in June that the campaign has been described as the country’s “first climate election,” with the question of how to achieve a green transformation topping the agenda in debates among the candidates for prime minister and other posts.

Looking beyond Denmark, Jørgensen said Denmark and its partners in the European Union were sad to see the United States withdraw from the Paris climate agreement and hope it will reconsider. “There’s nothing I would hope more than the U.S. taking leadership on the global stage also on green issues,” he said.

Join the battle

Denmark, World, Scheme
Denmark’s official in charge of climate matters says his country hopes to set an example for the world with an ambitious scheme to cut carbon emissions by 70% in little more than a decade. Pixabay

Meanwhile, Jørgensen said, all countries and especially the “big growing economies” must join in the battle to prevent climate change “from becoming irreversible and having the most catastrophic consequences.”

But he acknowledges the frustration of newly developing countries, which are only now acquiring energy-intensive amenities that the developed nations have long enjoyed.

“It’s not up to us who’ve been polluting and emitting greenhouse gases for more than 100 years — when I say us, I mean the West, the United States, Europe — it’s not up to us to tell them, ‘No, you cannot drive a car, you cannot buy a fridge or an air conditioner, no, you can’t start to eat meat a few times a week because you can afford it all of a sudden because you’ve come out of poverty.’ ”

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Rather, he said, it is up to Denmark and the other developed countries to say, “Can we help you in any way to make that growth green?” (VOA)