Brexit: The future of EUR/GBP
A look at how Brexit is impacting EUR/GBP
Off the radar
Throughout the entire year 2020, Brexit has
been one of the main headlines in the media. Eventually, during the very last
week of December, the UK-EU deal was agreed. A couple of weeks passed since
then, and we hardly hear of Brexit
since. In the meantime, its effects will start manifesting soon enough. What
might they be?
Winner's view
According to Boris Johnson, the finalized
Brexit is a big victory for the UK. And the Brexit deal - as opposed to the
previously possible option of no deal - is even a bigger achievement. From a
human point of view, that's understandable. Boris Johnson and his supporters long
sought the separation from the EU, and eventually, they did it. For them, it's a
reward for a "long day's march". They see the restoration of the complete
sovereignty of Great Britain as the main outcome of the Brexit process. The UK
is no longer obliged to follow any overriding legislation such as the one the
EU previously had over it. It's a completely sovereign and independent state. In
this context, even a no-deal Brexit would be a success, just for a higher
price. Therefore, making the deal with the EU puts the UK even in a better
position. Roughly speaking, Boris Johnson presents the deal this way: the UK
can enjoy free trade with the EU almost like it was before while it can also
enjoy all the liberties of independence. It's a "Canada-style" agreement,
according to the UK PM's words. A victory, in other words. That's the
impression you get after listening to the speech Boris Johnson gave in Brussels
on December 24.
Observer's view
Most analysts agree now that the UK will
suffer more than it gains having left the EU. Therefore, the benefits of the
deal do not seem to outweigh the losses that come from the strategic separation
of the UK. Yes, the fisheries - as Boris Johnson specifically mentioned in his
speech - will gain: the UK's portion of the catch increases from ½ to 2/3 over
a few years, and then becomes completely unlimited. Fair enough: a sovereign
state can fish as much as it wants, in its own waters. But fishing accounts for
less than 1% of the British economy - and even that one percent is largely
coming from selling British fish in the European markets which will be more
selective from now on. That very much represents the entire state of affairs
with Brexit outcomes for the UK: as long as it wants to make business with the EU,
it will need to comply with the EU now-external-for-the-UK rules. In the
meantime, many businesses, especially those of finance, already choose to
re-base to France or other European countries as they don't have legal permits
to stay in the UK. Strategically, there will be more bureaucracy - and hence,
more fees and non-tariff barriers - for every British business that wants to do
trade with the EU. The international investment will see it harder to get into
the UK, too. Overall, an average estimation of the Brexit outcome is the
following: the UK is now free to do what it pleases, but this liberty may cost
it weaker international investor interest, lower economic output, slower
business activity. So, generally, less of everything. How much less - we are
yet to see.
Pound's view
0.90 has been the baseline level for EUR/GBP over the last year. Now, as Brexit tension is over, and the emotional element in the pair's behavior is weaker, it is likely to follow fundamentals more. In the mid-term, it will be about which one's economy is weaker against the virus fallout: the UK, or Europe. In the long-term, when the virus will be gone (more or less, eventually), it's about which one's economy is more robust and attractive to investors. In the latter comparison, the EU seems to be up for a better outlook. Therefore, in the mid-term, EUR/GBP will possibly fluctuate around 0.90 and may check the depths of 0.87. However, in the long-term, 0.93 may be a very feasible target for bulls.
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