Why won't the pound rise after the Brexit deal?

Even a last-minute trade deal with the EU has not helped the British pound. In fact, the currency is under considerable pressure, because the economy in Great Britain is largely flat due to the highly contagious local variant of the corona virus.

Britain is being disproportionately hit by the corona pandemic. Because the local virus variant is spreading faster than in other regions, British Prime Minister Boris Johnson announced lockdown measures last week that pale in comparison to those of the Netherlands. A very large part of economic life has come to a standstill. The lockdown is not expected to end until a large part of the population has been vaccinated.

This is happening at a time when the country is already in pretty bad shape. Due to Brexit uncertainty and corona, Brits have postponed major spending. For example, car sales fell 2020% in 30 to their lowest level since 1992. As long as the economy continues to struggle, the Bank of England will be under intense pressure to keep interest rates extremely low. This is at the expense of the attractiveness of the pound.

Happy divorce
It is also an important reason that the currency did not rebound after the Brexit deal. At the last minute of the new year, Europe and Great Britain broke up with good trade agreements. Since then, a handful of British travelers have been sent back through the Netherlands and Germany, but those are the exceptions.

On balance, people and especially goods will cross the border a lot easier in 2021 than almost everyone dared to hope. This is largely due to smart technology. Document checks, for example, are largely performed digitally. If something is not right, a truck driver is instructed to follow a separate route for extra control.

game of bluff poker
In the first days of the new year, the pound fluctuates slightly above a value of € 1,10. By way of comparison: a year ago that was still € 1,18. And before the Brexit referendum in 2016, you got more than €1,30 for one pound. Despite everything, it is not wise to bet against the pound right now. If only because just about all investment banks and currency strategists are pessimistic about the currency's prospects.

When specialists are very united, it often only takes a small windfall to change the sentiment. Add to that the fact that the British economy can catch up considerably if corona comes under control and Brexit is no longer a major source of distraction. Despite the lackluster start to the year, the pound could easily become one of the currency surprises of 2021. 

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.

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