Pound could lose more than 10 per cent of its value with a no-deal Brexit

The Pound has come under immense pressure in 2018 with the uncertainties surrounding Brexit creating significant volatility in the foreign exchange market.

Even foreign betting firms such as American sports betting firms, who invested in forex, took an optimistic view but while past political and economic events are no indicator of future performance of financial markets, Michael Brown, Senior Analyst at Caxton looks back at the value of Sterling over time and shares his forecast for 2019.

“When the Euro was first introduced on Friday 1^st January 1999, it was trading at 1.4063 against the pound. At the time, the US dollar was averaging around 1.6600.

 “Shortly after the introduction of the single currency at the beginning of the millennium, the pound was at its all-time best against the single currency, trading above €1.74 level. This came after the ECB intervened in the currency markets to prop up the Euro after a steep fall in value of more than 30% versus the Dollar.

“Since then we have seen the financial crisis of 2008 where sterling lost more than 25% of its value, with the pound falling to an all-time low of €1.0220 and to a level around $1.45 against the dollar.

“Despite the previous sharp falls in value, sterling has generally recovered in the months following a sharp decline, for example with the pound easing back to post-crisis highs as uncertainty was removed from the market. It remains to be seen whether this will occur post-Brexit.

 “Looking ahead to 2019, there are few sterling-positive scenarios with the pound set to remain volatile and driven by Brexit related headlines. A best-case scenario for the pound would be an orderly, soft Brexit combined with a shift in market thinking to price in further Bank of England rate hikes next year. This could yield 3%-4% of sterling upside although such an outcome looks unlikely at present.

“On the other hand, it is doubtful that firm progress on the EU-UK relationship is made next year  especially with parliament in the UK yet to decide on the outcome that it wants from talks, and the EU having other areas of focus including the Italian budget and European elections. In addition, while this uncertainty remains, calls for a second referendum or even a general election are unlikely to go away, keeping the pound under significant downward pressure in the near-term.

 “In the event of a no-deal Brexit, sterling would likely experience a brutal sell-off, with the pound potentially losing more than 10% of its value.”