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How Likely Is A Trade Deal And How Will It Affect The Pound?

| December 06, 18:16 GMT | By Zain S Aveiq

As the British and European leaders aim to finalize and commence a Brexit trade deal that would mark an end to the political instability and financial turmoil, the British pound and its future remain uncertain in a post-Brexit environment. A trade deal would facilitate EU-UK trade, which accounts for 49% of the international UK trade. And with increasing hopes that a trade deal will most likely proceed, the Pound has reached its highest level against the US Dollar in almost a year. It is largely anticipated that the Brexit trade deal will have a huge impact on the pound, but the uncertainty remains due to the current economic situation and the turmoil being triggered in the financial markets by the Covid 19 pandemic. While the final conclusion to the Brexit trade situation remains to be seen, many financial analysts are anticipating an optimistic future for the pound in hope of a successful trade deal.

The EU’s chief negotiator Michel Barnier told the European parliament “Despite the difficulties we’ve faced, an agreement is within reach if both sides are willing to work constructively, if both sides are willing to compromise and if we are able to make progress in the next few days on the basis of legal texts and if we are ready over the next few days to resolve the sticking points, the trickiest subjects”. His take and comments in the situation have given a positive sign to various currency market participants in the hope of a strengthening pound. With a high probability of both parties coming to a mutual agreement, the financial markets are expecting a positive outcome. And according to Reuters, an unexpected agreement would result in the trigger of around a 5% jump in the value of pound sterling to 85 cents against the euro.

With a surprise agreement, the financial markets including the FTSE 100 would most likely take a heavy blow as majority of the companies listed in the blue-chip index mainly earn their income outside the UK. Although a successful deal between the two parties would support the pound at the current levels and give a huge boost to its value, the future of the pound also resided in the future of the economy. But with the Covid 19 pandemic causing huge economic turmoil, a recovery is very challenging. The effects of the Brexit trade deal on the pound also depend upon the future success of the trade deal in a post-Brexit environment, combined with the UK’s overall economic growth. With the UK and the European Union coming together to strike a trade deal, several big differences and challenges are yet to be decided and tackled.

However, in the event of a No-Deal Brexit, the impact on the pound would be quite negative. With several issues and differences that the two sides haven’t been able to solve, there remains an uncertainty in the environment. The pound could see a severe fall and decline in its value in the event of a negative Brexit outcome, as it would lead to the depreciation of the currency’s value. And considering the current Covid-19 scenario, the economic growth and revival are quite difficult. Without a trade deal, the U.K. economy would suffer a near-term shock of around 1.5% of GDP, according to Bloomberg Economics. The Office for Budget Responsibility, Britain’s independent spending watchdog, forecasts a 2% GDP decline. Furthermore, instead of frictionless trade with a market of more than 400 million consumers, British firms would revert to trading under EU rules which mean imports and exports to the EU would be subject to WTO-negotiated tariffs -- essentially a tax on goods.

Tariffs could also lead to increased prices for companies and consumers. For supermarkets, the cost would be 3.1 billion pounds ($4 billion) a year, according to the British Retail Consortium. Some 85% of foods imported from the EU would attract tariffs of 5% or more. The EU is the biggest export partner for the United Kingdom, accounting for almost 46% of the nation’s export. And a negative Brexit-trade deal will affect this relation and several sectors like the service sector, which would be badly hit by a no-deal Brexit. Companies may have to comply with two separate regimes for product standards and regulations, needing approvals from U.K. and EU bodies to have the right to sell in both markets. For example, some goods will need to bear a new U.K. Conformity Assessed (UKCA) mark from Jan. 1, instead of the EU’s CE mark, in order to be sold in Britain. The services sector -- which make up 80% of Britain’s economy -- would face new restrictions. British architects and consultants would be among professionals who would lose their automatic right to offer their services across Europe. Firms may need to establish an office in the EU to continue trading and may have to seek local approval for their professional qualifications.

Possible Scenarios Faced By GBPUSD

Overall, the pound has faced several fundamental transitions including both highs and lows, all due to the several years of Brexit trade deal uncertainty.

The general macro environment and the economy seem positive and optimistic for the pound, increasing the hope of currency market participants towards a strengthening pound. Analysts predict that the pound could rally to potentially high levels in the coming time if a favourable outcome is brought around in the Brexit trade deal. But in the end, the future scenario for the British Pound depends on the UK’s overall economic growth and the Bank of England’s monetary policy decisions, which will eventually decide the future of the pound in a post-Brexit environment.

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