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The Fall of Sterling - A Brexit Effect




Foreign currency brokers are now hanging on the convulsions of the House of Commons. At the same time that British Prime Minister Theresa May announced on Monday, December 10, the postponement sine die of the vote of Parliament on the withdrawal agreement of the European Union (EU), the pound fell quite heavily, giving up more than 1 %.


This new decline follows a gradual slide initiated four weeks ago. The British currency has now reached its low point for eighteen months against the dollar, at 1.25. Against the euro, it is back to one of its historic lows, at 1.10, and, against a basket of major currencies, it is only 4% -5% above the lowest level ever recorded, according to the calculations of Nomura, a Japanese bank (the two lowest points having been reached after the financial crisis of 2008 and the recession of 1992).


What cause the black humor of the traders. "Opinion is divided as to who has the blackest future: the struggling British pound or the besieged British prime minister," says David Lamb, head of the brokerage division at Fexco Corporate Payments, a transfer specialist international money.


"All scenarios lead to a dead end"

Taking a step back, however, it appears that the fall of recent days represents only an epiphenomenon among the jolts that agitate the pound since the referendum on Brexit. After the vote of 23 June 2016, she lost 15%. Since then, it has oscillated within a stable range, as the negotiations on the endless process of EU withdrawal from the UK proceed.


There is little panic in the markets. Brokers are reassured by looking long term. They particularly cling to the fact that MEPs have an amendment that will allow them to block the prospect of a Brexit in January without agreement. "The current political turmoil is of little importance to the end result," said Christopher Granville of TS Lombard, an economic research firm. Parliament will reject the EU withdrawal agreement, but it will also block a crash outside the EU. "


The obscure tussles between British MPs, however, provoke an eager demand for information from financiers on parliamentary debates. Proof of this is that a former adviser to the Brexit Ministry, recruited by a large British bank, is now in great demand. "I thought I was hired to lobby the bank with MPs and ministries, but I do the opposite: I spend my time meeting with the bank's clients to try to explain to them what is happening in Parliament and government, "he says. He himself is the first to recognize it: he does not know more than the others what will be the outcome of these discussions. "All scenarios lead to a dead end. "


In this fog, brokers try to assess the probabilities of different scenarios. "I would say 10% for a crash without agreement, 20% -25% for the cancellation of Brexit, and the rest for a Brexit with agreement," explained, before the postponement of the vote, Peter Westaway, chief economist for the Vanguard Europe, the world's second largest management company. This total uncertainty, with diametrically opposed results, makes it very difficult for Brexit investments in the markets. "The easiest way is not to touch British assets," he says. And to let the sterling oscillate at the mercy of this impossible Anglo-English debate, until a solution emerges.


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