The US-UK Trade Deal Might Just Save The Pound From A 2020 Freefall

Posted: Mar 09, 2020 10:12 AM
The US-UK Trade Deal Might Just Save The Pound From A 2020 Freefall

Source: AP Photo/Kirsty Wigglesworth

When David Cameron announced a public referendum on the UK’s continued participation in the European Union, skeptics and critics were quick to highlight a litany of consequences that could plunge the country into chaos. Chief among those concerns was the value of the British pound, which plummeted after the referendum

Writing for the World Economic Forum, Princeton Professor Harold James, an expert in Europe’s economy, wondered if Brexit would “break the pound,” and countless experts expressed their certainty that Brexit would be an utter disaster.

However, more than three years after the referendum’s announcement in 2016 and nearly a month after the UK’s official departure from the bloc, signs are strong that the consequences of removal will not be as profound as the pundits feared. While officials have many details to navigate, there is a sense that British society and currency are unlikely to disintegrate.

As far as the pound is concerned, Brexit is actually proving to be a boon so far. The British pound is still trading higher than both the euro and the US dollar, possibly buoyed by buzz surrounding the eventuality of a US-UK trade deal. 

The deal, which leaders from both countries are still negotiating, could provide a boost for the UK economy, ensuring its access to the vast American market for years to come. At the same time, its completion could serve as a signal that, despite the initial shock surrounding the UK’s departure, Brits will continue to have plenty of opportunities to compete in today’s global economy. 

In both the short and long term, a US-UK trade deal could continue to keep the pound up. Here’s why. 

Confidence is climbing

Back in the fall, as Brexit approached, few mainstream columnists were optimistic about its potential for positive outcomes, and public opinion followed suit. Now, confidence is climbing as leaders are finally getting things done, and the reality isn’t as scary as many imagined. This restored consumer confidence ripples around the world, pushing the value of the pound even higher. 

Commenting on this shifting sentiment, Andrew Wishart, a UK-focused economist for Capital Economics, notes, “The market has become less worked up about the chance of a Labour government, and also some hope that a good-sized Conservative majority could kind of lift some Brexit uncertainty.”

Metrics based on emotions may be prone to unpredictable changes, but for now, a general sense of optimism should contribute to swelling investor confidence. 

Investors are attracted to stability

In many ways, Brexit was an unprecedented shift in geopolitics unseen in many of our lifetimes. As such, it cultivated an impression of chaos. The proximity of a US-UK trade deal restores a level of certainty that encourages investors to prioritize the pound. 

Alon Rajic, CEO of Money Transfer Comparison, whose company is closely following the financial fallout from Brexit, told me via email that “many FX investors are looking for a sure bet. They don’t put their money in currencies that could perform erratically or unpredictably. The UK’s ability to negotiate trade deals is calming investor concerns about the British pound.” 

Of course, a US-UK trade agreement isn’t the only deal on the table. UK officials are negotiating with Australia and China, two markets that would further solidify the UK’s ability to trade and cooperate outside the Eurozone. Collectively, these efforts are likely also keeping the pound afloat. 

Everyone is rooting for a win

The past three years have been difficult for everyone. Brexit exposed deep rifts in British society, and Megan and Harry weren’t the only people who wanted to cross the pond to Canada. Finally, the country can begin to move forward, and to a great degree, it’s the performance of the UK’s economy that will determine the pound’s price in 2020. 

As a result, many economists see the pound continuing to rise in the year ahead. As Jordan Rochester, a foreign exchange strategist at Nomura, recently told CNBC via a statement, “The removal of near-term hard Brexit risks, the widely expected fiscal expansion, U.S.-China trade tensions lower and a global recovery in economic data suggest the Bank of England will stay on hold.”

Indeed, many factors contribute to a country’s currency exchange rates. Still, successful trade deals with the US and other countries would go a long way toward promoting a strong economy and demonstrating British leadership’s steady hand. As a result, Rochester notes, “the market has yet to meaningfully price a rebound in U.K. and European data vs that of a slowing U.S. economy.”

No way to know for sure

Of course, these agreements have yet to be signed, and in 2020, the only certainty is change. However, both sides have plenty of motivation to hammer out a deal. I predict that they will and that their success will mean the continued ascension of the British pound.