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Will Hard Brexit Cause GBP Devaluation?

By August 27, 2019 November 1st, 2019 news

The hard Brexit effect on the Pound has been agonising: the GBP is slowly but surely rolling downhill, towards the devaluation rock bottom. It dropped to two-year lows against the USD right after Boris Johnson was elected as the new Prime Minister of the UK.

Understanding the reasons that impact the Pound is the key to making further investment predictions. Could this be the right time to step outside your comfort zone of trading on the Chunnel*? Or, on the contrary, could this be a great opportunity to multiply your profits?

Based on Johnson’s political positions, he is leading the country towards a hard Brexit. The GBP has been under a lot of pressure in the month of August, however, the real challenge is still to come on October 31.

The European Union is not only a friendly neighbour to the UK, but also a big contributor to its economy. According to 2017 statistics, the EU imports around 274 billion Pounds – or over 40% – worth of UK goods per year.

So far, British goods have been circulating in EU markets without restrictions. There are no import duties either. If a transition deal has not been negotiated by October 31, export revenues are expected to slump. Hard Brexit will result in the implementation of import tariffs on all goods travelling between the UK and EU. Regardless of how weak the Pound is, the exported goods will become more expensive and thus less competitive.

The slowing UK economy is yet another reason for a weaker GBP. Investors are led to believe that Britain will enter into a recession by the end of 2019. The domestic economy has already contracted by 0.2 percent in the second quarter, and many speculate that the damage will escalate.

The uncertainty over Brexit has also weakened the important manufacturing sector. Factories are finding it hard to plan ahead and are already switching their focus to other regions. Asia, the Americas, Africa and the Middle East are said to replace the EU market in the near future.

The Brexit turmoil has undermined the outlook on the Pound Sterling and its stability. The forecast for the GBP after Brexit is pessimistic. The impact of the British Pound devaluation is expected to put a strain on consumer spending, exports, wages, and inflation.

As of today, it is impossible to accurately estimate how hard the Pound may fall against other currencies in case of a no-deal brexit. Day traders, whose main priority is currency trading, should consider putting a stop loss on all their GBP trades on October 31.

*Chunnel – EUR/GBP. The name comes from the Channel Tunnel that connects Britain and the Euro zone through France.