Pound after Brexit: what are the long-term prospects for GBP
Since the Brexit referendum in the UK in the summer of 2016, the pound (GBP) has been under pressure from sellers. Investors are greatly worried about the outlook for the British economy after leaving the EU. But is Brexit so scary for the pound and is it worth waiting for the further collapse of the British currency?
How much the pound fell
The reaction to the referendum was quite emotional. Recall that the pound from the pre-Brexit level (1.47) to the low of 2016 fell by 20%.
After reaching a minimum of 1.2, the British currency is in a fairly volatile sideways trend. On February 20, 2019, the fall in relation to the day before the referendum has reached near 13%.
According to some estimates, capital outflow from the UK for the same period has reached $1 trillion. The Bank of England is considering that the British could become 10% poorer in the long run due to devaluation and capital outflow.
However, if you look at the dynamics of the main macroeconomic indicators of the UK, nothing especially terrible has happened so far. During 2.5 years, Britain’s GDP has been growing, the main macroeconomic indicators at a level or higher than the EU average. Some support to the market is also provided by the fact that in the event of a more significant devaluation, the Bank of England may tighten monetary policy. This will keep the pound from collapse.
What are the scenarios?
In the long term, the situation in the GBP/USD pair will largely depend on the conditions of a “divorce”. Now investors are most worried about the possibility of the so-called “hard Brexit” – this is a situation in which Britain will leave the EU without any agreement at all. This fact will lead to significant barriers to mutual trade, which will hit the UK and EU economies, but this scenario is not beneficial for both London and Brussels.
Most investors are tending to believe that the trade and political agreement will be approved by the British Parliament. If this will not happen before the exit date – March 29, 2019 – London may request delay of Brexit for further political consultations. If politicians approve of a civilized version of the divorce, which is actually beneficial to all, the pound will have good growth prospects up to 1.46.
Even with the pessimistic development are prospects of a long-term collapse of the British currency below the 2016 low (1.2) not big. The British economy is highly resilient and well diversified. Even if the bears succeed in pushing below 1.2 for a short time, this fall is likely to be quickly bought back.