Brexit and Trade Deal – What Will be the Impact on the Pound?

Brexit updates have dominated the headlines in the United Kingdom in recent weeks, with the pound sterling (GBP) taking the brunt, as it experiences wild fluctuations amid uncertainty. As the UK Department for International Trade prepares for negotiations with the EU regarding trade deals, hard lining tones have already emerged from both parties.

The UK Versus the EU

The UK seeks some kind of a treaty that will, above all, safeguard their financial services sector. The sector is UK’s biggest source of exports and revenue, and they are keen to maintain London’s status as a key global financial powerhouse. But the European Union has maintained that it is under no obligation to extend any favors or sweet deals to the UK, a non-member. EU has also categorically stated that its members will benefit from a smaller London, arguing that financial stability and capital markets development will be enhanced in member states.

The UK maintains that London plays a vital role in the European economy and as such, regulatory alignment and inter-institutional trust should be the starting point of the discussions. The financial services sector, that broadly includes banks, asset managers, insurers, payment service providers, credit rating agencies and auditors, promises to be the main bone of contention. While UK is firm on its stance, the EU is also keen not to let its financial rules and regulations be undercut by an ambitious London, with the bloc also contemplating on luring firms to relocate.

Meanwhile, the UK has also dangled a stick, warning that its promise to pay the Brexit bill (amounting to 40 billion pounds) hinges on whether they will get a good trade deal with the EU or not. The UK is intent on using this as leverage, considering it is one of the bloc’s largest contributors, but Brussels will likely reason that this is a bill for liabilities accrued and that London has a legal duty to oblige.

EUR/GBP Currency Pair

This sets the stage for a hard Brexit, or as is now said, a No-deal Brexit. Politically, UK Prime Minister Theresa May reshuffled her cabinet, with numerous pundits pointing out that a cabinet minister was appointed to deal specifically with the real possibility of a No-deal Brexit. This will heighten uncertainty on the British economy as currently, Forex websites are showing the pound greatly pressured in the EUR/GBP pair.

The alternative scenario is a smooth Brexit. This is where UK’s exit from the EU will have as minimal economic impacts as possible. This will require both parties to soften their stance and reach a compromise favorable to both. This will be particularly favorable to the pound as more investors will remain interested in the UK. This will pile more pressure on the EUR/GBP pair as investors gain more confidence in the British economy.

The most likely scenario, though, is a model of the Canadian deal with the EU. As the most modern deal, there is even a special chapter dedicated to financial services. Still, UK is demanding more for its bread and butter financial sector. The EU-Canadian deal does not allow for ‘passporting’ of financial firms, which essentially means that UK companies will only require registration in a single member country. For EU, offering more to London will lead to more demands from Ottawa, as outlined in the clause ‘most favored nation’ of the CETA deal.

Final Word

Trade deals involve lots of negotiations, and the current standoff threatens to set the stage for longer-than-normal discussions. Politically, the EU starts from a higher position, as all negotiations will begin after the UK formally exits the bloc. But London’s global stature and standing cannot be overlooked. With both parties insistent on protecting their interests, much volatility should be expected on the pound sterling in coming weeks and months.

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