Brexit roller coaster nearing end. And then?

British Prime Minister Boris Johnson reached a Brexit deal with the European Union on Thursday morning, October 17. However, will he also be able to guide that agreement through the House of Commons on Saturday 19 October? When it comes to that, the pound will be one of the big winners.

Do you know Richard Rodriguez? That's the roller coaster world champion. He once rode the roller coaster 'The Big One' for 112 days in a row. He covered more than 3 kilometers in almost 32.000 months and reached a top speed of 136 kilometers per hour. The British pound's ride started 4 years ago, when the rate slowly rose to over €1,42 in the run-up to the Brexit troubles. A series of unexpected turns and loops followed a 25% drop to just €1,06 earlier this year. The end of that roller coaster is now in sight. What will happen if it soon becomes 'business as usual' for the pound?

The last hurdle
Before that, Johnson has one more hurdle to clear. The British House of Commons will meet on Saturday 1 October to vote on the agreement that Johnson has concluded with the European Union. The Northern Ireland DUP party has already announced that they do not support the plan. Without that party, Johnson has an agreement with the European Union, but no majority in the House of Commons. That's exactly the hurdle where Theresa May fell this summer. Johnson therefore has to pull out all the stops to get the DUP behind him and thus still meet the Brexit deadline of October 19.

The British economy will undoubtedly breathe a sigh of relief when the exit from the European Union (at least on paper) is completed. The second quarter saw a further contraction of 0,2%, while according to the British Chamber of Commerce the country is heading for growth of less than 1% in 2020. This very moderate growth outlook is mainly due to the fact that the consumer and business confidence has seeped away due to a lack of clarity about the political future. If consumers and businesses know where they stand, confidence will pick up again and growth forecasts will finally pick up again after several years of declines.

Quick to London
Usually, a currency takes a tailwind when a country's economic growth accelerates. Another boost is the cessation of capital outflows. A tour of consultancy firm Devere Group revealed that more than 60% of those surveyed are in the process of transferring capital abroad for fear of a no-deal Brexit. The pound is therefore one of the big winners in a possible agreement. Although it is of course dangerous to get on the still moving roller coaster now. Anyone considering a weekend trip to London should perhaps not wait too long.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

© DCA Market Intelligence. This market information is subject to copyright. It is not permitted to reproduce, distribute, disseminate or make the content available to third parties for compensation, in any form, without the express written permission of DCA Market Intelligence.