Will Optimism Last for the British Pound Sterling?

Detail of a pound coin
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The British Pound (GPB-USD) has been on the rise since yesterday, as British Prime Minister Rishi Sunak accomplished something that his predecessors were unable to. Traders now have hope that one of the most difficult aspects of Brexit have been resolved with the E.U. and that the relationship between the E.U. and the U.K. will reset. This could hopefully bring prosperity once again for the U.K.'s economy, pulling the Brits out of their crisis with their living costs. As a result of the self-inflicted wounds being so severe, market participants are uncertain as to how long this current optimism will last.

Even though it has been almost three years since Brexit was official and the United Kingdom exited the European Union, the concerns with commercial barriers in Northern Ireland had been unresolved. Yesterday, Sunak was successful in overcoming these trade restrictions, and reaching an agreement with the European Union on a pact that is being referred to as the "new Windsor Framework." However, in spite of the fact that Sunak referred to his achievement as a "decisive breakthrough," no member of his own party in the British Parliament has made a big deal out of it.

Since the new agreement establishes separate "green" and "red" lanes for different types of trade routes, products that are not leaving the United Kingdom will go via the "green" lane and will not be subject to the challenges of cumbersome paperwork and complicated customs procedures. Products leaving the United Kingdom will be required to go through red lanes, where as part of the agreement, adjustments to excise taxes and value-added taxes in the United Kingdom will be implemented in Northern Ireland. Medicines approved by the U.K. will be accessible in Northern Ireland immediately, with no restrictions from the European Union.

Currency traders have been suspicious that Sunak would be able to get a deal done since the specifics of the agreements weren't given before the announcement. Given that Sunak and European Commission President Ursula von der Leyen have finally reached an agreement, the value of the Pound has risen for the second day in a row versus the dollar.

Since investors anticipate that the agreement would enhance economic circumstances between the United Kingdom and the European Union, the value of the euro has also increased to a good degree. 

Unfortunately, there are still several obstacles to overcome, and because of this, the Sterling is likely unable to make considerable progress at this time. For starters, this agreement needs to get unanimous approval from the House of Commons of the United Kingdom, and that vote is scheduled to take place within the next week at some point. The market is apprehensive since previous agreements have been voted down by Parliament. Also, the Democratic Unionist Party (DUP) in Northern Ireland could attempt to throw in some obstacles, but Sunak has made it plain that this is one of his least concerns at this point in time.

If the DUP party does not agree to accept the deal, Sunak's own party may try to back out of the whole transaction altogether, making the approval of the DUP party absolutely necessary from a commercial point of view.

When it comes to the pound sterling, currency traders need to keep in mind another essential fact: inflation in the United Kingdom is far from normal levels and will not change anytime soon. This is an essential aspect. To cushion the effect of an economic downturn, the Bank of England does not have any advantageous choices available to it. The Bank of England is largely expected to keep raising interest rates for the time being, which will only make the current economic downturn linger. In fact, the majority of economists believe that the U.K. will experience the longest period of recession throughout the whole of the European Union. This is something that is quite likely to have a negative impact on the value of the Pound.

In conclusion, the path of least resistance for sterling may be skewed to the upside, but gains are most likely to stay minor.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Naeem Aslam

I am a former Hedge Fund Trader with over 15 years of experience in investment banking. During my early career, I was awarded a national award (Young Irish Broker) in 2010. Over the years, I have worked with Bank of America in equity trading and with Bank of New York in hedge fund trading. I specialize in Blockchain technologies (cryptocurrencies and digital assets) and Sustainable Investments. In my career thus far, I have also extensively covered Equities, Commodities and Forex.

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