The GBP has been inextricably linked to the ongoing Brexit crisis in the UK for some time now. Traders originally shorted it on the night of the Brexit referendum, and many have been cleaning up with tactical shorts on sterling ever since.
Short sterling has not been a long term play, however, as every time it looks as if there might be some way to resolve the Brexit impasse, GBP does rally. The problem, however, is that the European Union seems less worried about a hard Brexit, a withdrawal with no deal, than many traders may believe. Each rally has proved to be somewhat of a false dawn.
Domestic political developments in the UK have applied further pressure on the pound, however. With the UK government’s decision to prorogue Parliament for five weeks this autumn, severely curtailing the time available for Parliament to debate the possibility of extending the Brexit deadline, further shorting of the pound has begun.
“The pressure will remain on the pound for the foreseeable future as the possibility of a no-deal Brexit increases,” says Nigel Green, chief executive of deVere Group. “Should the UK leave with no deal, the pound is likely to remain weak for several years until the country and the bloc readjusts. In addition, the likelihood of a general election is weighing on the currency.”
A general election may be the only way to reach a conclusion to the sorry Brexit saga, as it would either reinforce the original Brexit referendum by bringing in a majority government that had the mandate to see Brexit through to its conclusion, or would reverse that decision at the polls. There would be a smaller risk of another hung parliament, with a minority government.
Green worries that there is a risk of a Jeremy Corbyn-led socialist government that would be bad for business and would lead to further selling of the pound.
“Sterling continues to reflect market optimism or pessimism over the prospects for a smooth and orderly exit from the EU,” says Andy Scott, Associate Director at the JCRA. “The fact that it is towards historic lows against both the US Dollar and Euro reflect not just the uncertainty over Brexit, but increasingly the risk that the UK crashes out and suffers a significant economic shock as a result.”
The obvious profitability of the short sterling trade has attracted the attention of hedge funds as well, with many pro traders now taking up positions against the currency. The obvious pair to trade CFDs with is GBP/USD, largely because any further losses to the pound will be greater there. A hard Brexit will also mean some selling of the Euro, since there will be an impact on some Eurozone economies, notably Ireland and France, although Spain is likely to suffer too.
As Parliament wrestles with the government, and as the deadline to leave the EU gets ever nearer, the UK is entering a period of crisis. The UK economy, behind the scenes, will also continue to suffer as the crisis grinds on, and we will see further negative numbers coming out between now and the end of the year.
Expect these to provide further impetus as the pound approaches parity with the Euro.