Brexit cast a long shadow over the pound in 2019, but what will 2020 have in store for sterling?
Caution from the Bank of England and faltering economic results were all seen through the lens of Brexit. Now while the focus may move slightly from the challenges of uncertainty due to a political impasse, the UK’s departure from the EU is likely to loom large in the minds of investors.
Agreeing a Brexit deal was only the first step. The transition period runs until the end of 2020, which means that the government has just 11 months to negotiate alternative arrangements with the EU and new trade deals with countries further afield. It’s likely that both confirmed deals and rumours could have an influence on the pound. Overall, positive developments regarding trade deals may give the pound a boost, but any sense that progress is not being made may put pressure on sterling because of the ramifications for UK businesses if new trade deals hit any roadblocks. While there is time to negotiate alternative deals in the coming year, businesses are still facing the possibility of a no-deal departure at the end of the year if the arrangements aren’t secured in time.
What are the domestic factors to watch next year?
In 2019, investors were too focused on Brexit to pay too much attention to domestic economic statistics, particularly because they largely reflected concerns over the UK’s departure from the EU and added nothing new to the picture. With some of the initial heat off Brexit, there may be a greater focus on measures such as the Purchasing Managers’ Indices, GDP and business confidence. The market will be looking for an improvement after a challenging year in 2019, but 2020 may not be all plain sailing. Improvements in the economy will also have an impact on inflation, wages, employment and a range of other economic factors. In turn, these will have an influence on Bank of England (BoE) policy and interest rates. Decisions by the BoE’s Monetary Policy Committee (MPC) may also have an impact on sterling and investors will be expecting some movement and change of direction after a year of waiting for the uncertainty around Brexit to be cleared up.
International influences on the fate of the pound
Just like the pound, every currency fluctuates in value based on a range of political and economic factors. Currencies fluctuate in relation to each other, so developments elsewhere could have a knock-on effect on the pound. The decision by the European Central Bank (ECB) to implement a Quantitative Easing (QE) programme of fiscal stimulus has analysts watching the euro closely. Indications that QE is having the required effect, or that the ECB may be changing course could have an effect on the FX market and may present an opportunity for sterling to make gains. Political uncertainty is generally bad news for a currency and the US Presidential elections in November 2020 could cause some market volatility.
Looking to the future
It is difficult to say for certain what will happen next for sterling because there are so many interdependent factors at play. The pound could benefit from greater certainty over Brexit, but only if replacement deals are reached by the end of the year and businesses are given the opportunity to grow. The progress of trade could also improve business confidence and investment. Time will tell whether the new Bank of England Governor to replace Mark Carney in March may also have an impact on sterling. The Monetary Policy Committee may change its approach when led by Andrew Bailey, but it may choose to stay the same course. Sterling is approaching fresh terrain after a long period of uncertainty and currency volatility – it may not be all plain sailing from here but an altered landscape may change the pound’s performance in the coming year.
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