Currency NewsCurrency News

Bracing for Brexit

Where has 2020 gone? With everything this year has thrown us, it might be easy to miss the potential cliff-edge scenario that is currently playing out over the looming Brexit deadline.

The widespread shock at the UK voting to leave the European Union has now subsided, but four years later there is still uncertainty around the future relationship, and the future of doing business. Negotiations are truly down to the wire, and all eyes are watching to see if negotiators can get the job done in time to prevent further economic fallout for the UK and the shocks that will be felt in the financial markets.

The UK is aiming for a deal by the EU summit on October 15, the EU’s target is the end of October. Whatever the deadline, a trade deal between the two parties is increasingly urgent, and progress, or lack of, will have consequences for both the pound and the euro.

Let's recap on how we got here:

June 23, 2016

The in/out referendum on the UK's membership of the EU sees Leave campaigners win a narrow victory.

June 26, 2017

Formal negotiations on withdrawal begin between the UK and the EU.

December 15, 2017

The EU agrees to move on to the second phase of negotiations after an agreement is reached on the Brexit “divorce bill”, Irish border and EU citizens’ rights.

March 20, 2019

UK Government seeks permission from the EU to agree on a later Brexit date (original date March 29, 2019).

March 21, 2019

EU27 leaders agree to grant an extension comprising two possible dates: 22 May 2019, should the Withdrawal Agreement gain approval from MPs; or 12 April 2019, should the Withdrawal Agreement not be approved by the House of Commons.

April 2, 2019

The UK Prime Minister announces she will seek a further extension to the Article 50 process.

April 10, 2019

The UK and EU27 agree to extend Article 50 until 31 October 2019.

October 19, 2019

UK Prime Minister writes to European Council president, requesting an extension to the Brexit process.

October 28, 2019

EU Ambassadors agree to further a Brexit extension to January 31 2020. The Prime Minister confirms the UK’s agreement to this.

January 23, 2020

UK legislation that will implement the withdrawal agreement negotiated by the UK and the EU becomes law by Royal Assent.

January 31, 2020

 

The UK leaves the European Union and enters a transition period to run until the end of the year.

October 31, 2020

Deadline for the EU and UK to agree on trade deal in time to pass new laws through UK and EU parliaments

December 31, 2020

The transition period is due to end and the new economic and political relationship between the UK and the EU to begin.

Source  

 

What’s happening now?

At the time of writing, the ninth and final round of trade talks have commenced in Brussels but it remains to be seen whether any of the sticking points between the two parties can be overcome.

Proposed UK legislation (the Internal Market Bill) which aims to protect UK businesses from additional regulation has now cleared all stages of approval in the House of Commons and will proceed to the upper house1. This legislation has caused controversy as the EU (and even some members within the Prime Minister’s own party) claim it would result in the UK breaking international law, as parts of the bill override the Brexit divorce deal.

The EU asked the UK government to remove “contentious parts”2 of the bill however the UK continues to stand by the legislation. On October 1, the EU launched legal action against the UK over the infringements, giving them one month to respond.

If you think that relations sound tense, you'd be right. The exchanges between the EU and UK are doing little to instil confidence that a trade deal can be achieved in time for the end of the transition period. However, both sides are still expressing cautious optimism that a deal can still be done3. The currency market is attuned to these headlines, with the pound bouncing with any optimistic news around negotiations.

What’s the impact for UK businesses if no deal is reached?

Hamish Muress, Senior Manager, OFX London, believes that if the parties fail to make a deal it will cause a huge amount of uncertainty for UK businesses and consumers. "The Internal Market Bill has been the latest spanner in the works thrown by the UK and if this passes through Parliament it is unlikely that the EU will sign a free trade deal with the UK or any deal at all.”

If no deal can be agreed, British businesses are still facing the real possibility of a steep rise in tariffs and costs to export to, or import from, their nearest and biggest trading bloc when the transition period ends on December 31 2020.

Businesses will also have to deal with additional red tape. As an example, outbound UK freight will now need to acquire a special permit to go through Kent to reach the port of Dover after the end of the transition period. The move has been designed to smooth the flow of traffic through the county but has been slammed as pointless by the Road Haulage Association4, among others.

As the deadline looms, it is vital that businesses do everything they can to offset any additional costs they will incur if they trade with EU countries, and one way of helping this is to ensure you’re not paying more than necessary on your currency transfers.

Pound sees increased volatility

The Market Bill disagreement has created more volatility for the pound, which has been negatively impacted since the day of the EU Referendum on June 23, 20165. On September 12 2020, the pound hit a six-month low against the euro when it dropped to €1.0799. On the same day, it fell to US$1.2795, after having held ground above US$1.30 since July 30. At the time of writing, it had recovered some ground, but was still below the US$1.30 threshold.

That said, the uncertainty hasn’t been good news for the euro either, although the weakening US dollar has helped the euro hold its ground more readily against the US dollar than it otherwise might have

If you need to move money between the US dollar and the euro, keep a close eye on both the US dollar in the lead up to the US election and Brexit news as  increased volatility is expected. “It has been the case for the last four years that bad Brexit news is negative for the euro almost as much as it is for the pound. Because of that, any swings will be more significant against the US dollar than the euro,” Mr Muress explains.

“Undoubtedly volatility is likely in the short-term and this could be exaggerated if a ‘No Deal’ scenario comes overnight and out of the blue”

When uncertainty is for certain

Adding to the Brexit uncertainty for UK businesses and consumers is the announcement  that further COVID-19 restrictions could be in place until March 20216 which means businesses could be affected much longer and hit harder than originally anticipated. This will make it harder for businesses to anticipate their expenses and international money transfer requirements in the next six months. A second wave of COVID-19 compounded with Brexit will not bode well for Britain’s longer-term economic recovery.

OFXpert tip: Mr Muress encourages businesses and individuals who need to move money between the pound and the euro or either of these currencies and the US dollar to begin putting plans in place now to allow for some level of protection, whatever the outcome of the trade deal. “Speak to your FX partners, re-establish any budgeted levels and be prepared to take out any protection for a portion of your FX exposure depending on your risk appetite. Importantly, don’t leave things too late.”

______

1https://news.sky.com/story/brexit-mps-approve-controversial-uk-internal-market-bill-12085505
2https://www.bbc.com/news/uk-politics-54341534
3https://www.bloomberg.com/news/articles/2020-09-28/brexit-talks-enter-key-week-with-time-and-trust-running-out
4https://news.sky.com/story/brexit-pointless-kent-access-permits-a-tick-box-exercise-industry-body-claims-12080100
5https://www.euronews.com/2020/01/30/brexit-timeline-2016-2020-key-events-in-the-uk-s-path-from-referendum-to-eu-exit
6https://www.bloomberg.com/opinion/articles/2020-09-23/u-k-lockdown-boris-johnson-s-six-month-covid-plan-carries-heavy-cost z

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.