English (India)

British Pound is a victim of politics rather than economics

calendar 10/09/2020 - 16:32 UTC

The British government has already provided corona fiscal stimulus (grants) worth over 15% of then 2019 GDP, while the BOE provided over 30% (of GDP) liquidity (loans). But as British Pound is a victim of Brexit politics rather than economics, the currency (GBP) may be under stress on growing Brexit uncertainty in the coming days despite significant ease of corona uncertainty. Also, as an export savvy (financial and travel & tourism) economy, the BOE/British government prefers to keep GBPUSD within 1.20-1.30 broad range as it would complement Britain’s imported inflation in the current context.

The BOE will not allow the GBPUSD in the range of 1.30-1.40 or above 1.40-1.50 (pre-Brexit levels), whatever may be the narrative. Thus the BOE will jawbone the currency by NIRP narrative time to time, while the Johnson admin will also ramp up its hard stance on Brexit (no Brexit extension and FTA within Oct’20). All these will ensure the GBPUSD broad range within 1.20-1.30 rather than 1.30-1.40 in the coming days.

Over the last 4-years, since 2016, the British economy is a dual beneficiary of a devalued currency and free access to the EU trading zone (under existing FTA). GBPUSD was devalued by almost 20% after the mid-2016 Brexit referendum from 1.50 to 1.20. Subsequently, the export-heavy FTSE-100 soared despite Brexit uncertainty.

Now going forward, this dual benefit may not continue for Britain after Dec’20 if Johnson does not blink at the last moment. And Britain has to choose a Brexit extension or no trade deal hard Brexit (if there is no FTA by Dec’20). If there is a soft Brexit with an FTA with the EU, the GBPUSD may jump above 1.40, negative for British export, while in the case of a no-deal hard Brexit, Britain will have to trade with the EU under WTO tariffs, negative for the British economy, although GBPUSD may hover around 1.20 in that scenario. Johnson now wants the Canada style FTA with the EU.

Bottom line:

As EURGBP will strengthen to some extent under no-trade deal hard Brexit, it will also affect German/EU export to the U.K. coupled with higher tariffs under the WTO trade deal with the U.K. Thus Germany will not allow the hard Brexit (without FTA, but under WTO) under any circumstances and we should see an FTA by Oct’20, everything being equal. In that scenario, GBPUSD will jump further, negative for export-heavy FTSE-100, but positive for domestic savvy FTSE-250. Britain may eventually lose the earlier dual advantage of a devalued currency and free access to the Eurozone export market.

Technical View: GBPUSD

 

 

 

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