UK trade negotiations
The political and economic landscape of 2020
Trade deals are set to dominate the political and economic landscape of 2020 which will impact the pound in the months ahead. But remember, volatility in currency is not always a bad thing – you just need to know how to take advantage of market swings with the right combination of products.
So, for individuals and businesses who need to move money to or from the UK in the coming months, OFX has scoped out the impact of negotiation outcomes to give you a better idea of what could happen and how you can plan ahead with confidence.
The EU Withdrawal Bill passed through Parliament on December 20 last year with a 124-vote majority1 thanks largely to the Conservatives’ huge majority in the House of Commons. So, the next step is for the UK to officially leave the EU on January 31.
No deal is still a real possibility
A no-deal Brexit is still a real possibility as trade talks are pencilled in to be completed within 11 months before the transition period ends on December 31, 2020. No trade deal or no extension to the transition period would mean falling back onto World Trade Organisation terms – the one thing most businesses in Britain fear more than anything else2 because it means tariffs will increase substantially.
Why does it seem so unrealistic to have a deal done by Dec 31?
It’s no surprise businesses are nervous, it took Canada seven years to agree its deal with the EU.
Jake Trask, FX research director at OFX, said: “The self-imposed 11-month time limit set by Boris Johnson to get a comprehensive trade deal done seems completely unrealistic. New EU Commission President, Ursula von der Leyen advised it would be ‘virtually impossible’ to get a deal done by the end of the year at a recent speech in London3, so it seems we are facing another cliff edge scenario akin to when the withdrawal agreement was being finalised.”
There is already an EU Summit pencilled in for June this year4, and this is expected to be the point at which both sides need to determine whether they can realistically agree a deal by the end of December or need to extend their negotiations. Boris Johnson is adamant that he does not want to extend the transition period, but only time will tell whether that is feasible.
The effect of a falling pound
It is this level of uncertainty that will again weigh heavily on the pound and businesses and individuals should expect more volatility as the trade talks progress. If there is no trade deal completed between the UK and EU within the short timeframe, the pound could fall significantly which will be bad news for any UK companies that need to import raw materials, goods or services from overseas.
Just after the General Election result, the pound rallied to US$1.3350 but by January 13, as sentiment towards a deal being done lessened and expectations of an interest rate cut in the UK increased, this had fallen to US$1.2983.
Let’s say a UK business needed to buy raw materials from America. On December 13 transferring US$100,000 based market rates would have cost you £74,906.37, but by January 13 would have cost you £77,023.80 – an extra £2,117.43 within a single month. If you can’t risk busting your budget and need to move money to or from the UK, you might want to consider fixing the rate with OFX and trading before negotiation uncertainty takes hold with a forward contract.
What if you’re moving money to the UK?
After the election, a similar pattern was seen with the Australian dollar – on December 13 the pound was worth A$1.9435 but fell to A$1.8789 by January 13. Those looking to buy pounds from either the US or Australia would likely get a much better deal now. You can give yourself the best chance of benefiting from the ups and downs of trade talks by using a Limit Order. This allows you to target a set rate that you will automatically trade at, which can help you capitalise on any volatility without having to closely monitor fluctuations. OFX watches the market for you 24/7 so you don’t have to. Register today and one of our currency experts will give you a call.
What if a trade deal is done by the end of the year?
If a deal is completed, the pound could soar. This is primarily due to the certainty this will provide businesses and individuals going forwards. Certainty is positive for the pound, so as we head towards a deal – whether that is within the 11 months or during an extension if one is agreed – you should see the pound’s value strengthen.
Keep an eye on currencies at key trade talk moments
It is likely there will be some to-ing and fro-ing before the UK and EU get down to the nitty-gritty of trade discussions, and only at that stage will we see if real progress is being made. To find out how to make the best decisions no matter what happens with the UK’s trade negotiations, you can get in touch with OFX experts worldwide.
Download the OFX Currency Outlook
Learn more in the latest edition of the OFX Currency Outlook. It’s been produced to help you navigate market movements today, and to understand what to watch out for in the coming months.