Ever since the UK’s EU membership referendum (also known as Brexit) in 2016, the British pound has seen several ups and downs. It witnessed a range against the U.S. dollar between $1.50 on the night of the referendum, plunging to as low as $1.1450 then back up to $1.43, and then down to $1.19 again in September 2019. It performed its best in the last quarter of the year, gaining 6.6% against the US dollar. Q4 started off with Boris Johnson reaching a withdrawal agreement with the EU and finishing off with a huge majority in the December 12 elections. UK’s departure date from the EU of 31 January is now effectively set in stone.
Economists now predict that the Pound will fall against the Dollar and the Euro, as the government’s recent decision to not request an extension on Brexit has cast a pall of gloom. The announcement came as a blow, since the markets had assumed till then that Johnson might soften his Brexit approach post his election victory. Instead, it now seems that the PM is keen to get Brexit over with, even if it means the UK may not finalize the EU trade deal. This uncertainty impacted the sterling, so when the withdrawal agreement bill was passed in the House of Commons last Friday, the GBP-Dollar pair began its downwards spiral below the 1.30 level and dropped 1.2% against the euro to €1.18. The FTSE 250 share index, which features firms with more exposure to the UK economy, fell 1.4%.
But then, Brexit isn’t the only heat being felt by the Pound. Last week, Bank of England (BoE)’s decision to keep interest rates on hold also impacted the GBP-dollar pair, not to mention the vote in favour of an immediate cut by the Monetary Policy Committee, giving rise to speculations that the cost of borrowing could be reduced in the coming months. Then again, with Andrew Bailey, current chief executive of the Financial Conduct Authority set to replace outgoing BoE governor, Mark Carney, there is fresh uncertainty about the future of interest rates, as Bailey’s stance on the issue is still not clear. The drama surrounding the US-China trade deal, too, will cast its long shadow on the dollar this week, affecting the pound in turn.
However, the GBP likely to get a boost if economic growth picks up in 2020 and Johnson makes good on his promise to increase government spending in the next five years and put an end to austerity. Moreover, if the central bank raises borrowing costs gradually and to a limited extent as the risks lessen and the economy grows as expected, the sterling is likely to get a breath of fresh air.
Added to this, a modest weakness in the US dollar may limit the pound’s slide. Interest cuts from the world’s central banks, a possible resolution to the US-China trade war and the possibility of the US Federal Reserve cutting interest rates further and providing support to the economy, might all support the pound.