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Sterling outlook dims amid Brexit crisis- UK GCC investments at risk

UK's Sterling pound is feeling the Brexit pressure. How will this impact UK investment sentiment and the GCC?

The EU has agreed to a short deadline as April 12 is the last day for the UK to decide to participate in European Union elections The central bank rubber-stamped its interest rate at 0.75% while warning of increased risks to the economy The currency declined against its major peers such as the USD and Euro and overall the GBP’s historical two-year chart is a real cliff-hanger

Written by Jameel Ahmad, Global Head of Currency Strategy and Market Research at FXTM

Now that the Brexit deadline has been extended from March 29 to April 12, the stakes have multiplied for investors. A disapproving Parliament and increased political uncertainty in the UK could spell further Brexit volatility in financial markets both locally and globally. The EU has agreed to a short deadline as April 12 is the last day for the UK to decide to participate in European Union elections, potentially bringing more knock-on effects on Europe’s political scene in the short term if there’s a no-deal exit. Amid already sluggish economic growth, the EU can’t afford more political pressure affecting investor sentiment.

At this stage and after nearly three years of turbulence, the Bank of England’s stance has become more downbeat. The central bank rubber-stamped its interest rate at 0.75% while warning of increased risks to the economy, particularly investment and spending as multi-nationals plan to move their headquarters abroad and hold back from large-scale development projects. Bond instruments priced in Pounds are likely to suffer from further doubts in the absence of attractive returns from interest rates.

In short, it’s Brexit as usual marked by widespread investor caution and a 14% drop in business investment as the unpredictable process wears on. The Sterling’s performance suffers along with every unexpected development along the way. After the third rejection of Prime Minister May’s Brexit deal, the currency declined against its major peers such as the USD and Euro and overall the GBP’s historical two-year chart is a real cliff-hanger, amid economic uncertainty and alarming headlines as a result of Brexit uncertainty. At the time of writing, the prospect of stability seems far off, but then again, Brexit has been so unpredictable I don’t want to rule out any eventuality.

Should the Pound continue to show weakness and the worst-case scenario materialises with the UK losing its export markets to the EU overnight, there might be indirect pressure on UK investment into the GCC because falling exchange rates won’t favour British investors, at least in the short-to-medium term. 

On the other side of the coin, UK investment in the European Union may cool for a considerable period, and regions like the GCC may be first in line to benefit from this, provided the investment channels and a favourable trading environment are in place.  

Several more scenarios have opened since the deadline on Brexit was extended. Odds are on a no-deal Brexit on April 12 given the divisions in the British Parliament with the runner-up being a further extension or a reverse course on the entire procedure. If the UK doesn’t leave the EU by April 12, the odds will rise on the possibility of further high-stakes negotiations leading to an interim agreement like a simple Customs Union. The days until April 12 are likely to take a further toll on the Pound and potentially on British investment in the GCC but if a deal is reached to re-establish stability, the gloomy outlook of Brexit uncertainty may finally start clearing.

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