The Pound has remained remarkably resilient to the news over the weekend that a Brexit divorce deal is unlikely to be agreed this week. GBP/EUR remains quite close to €1.14 and GBP/USD around the $1.32 mark. This week however we are likely to see some significant developments that I think will cause some significant volatility for GBP exchange rates. Today we have UK jobs numbers, and the next few days sees some significant developments regarding Brexit that could either cause the Pound to soar, or crash.
In today’s post I’ll take a detailed look at what could happen with the jobs data and Brexit, and also look at ways you can protect yourself against the exchange rate moving against you.
UK Employment data
At 09:30am this morning we’ll see the latest jobs numbers, claimant count, Unemployment and Average earnings numbers. We expect the jobless rate to remain at 4%, average earnings to slip to around 2.8%, and claimant count around 10%. If the numbers are any worse than this then the Pound will weaken. If the numbers are better, the Pound may rise. However I think most focus will be on Brexit….
Brexit: Will an agreement be made, and how could the Pound react?
It was expected that this week, the EU would decide that enough progress would have been made in the negotiations to call a summit in November in which they would sign off the divorce deal. There is now not much chance of that happening unless Theresa May can make an 11th hour plea to EU leaders to make some concessions on the Irish border.
The problem is the Irish border. Assuming the EU and UK can negotiate a trade deal in the next 2 years, it’s not even an issue. However the EU want to place a ‘back stop’ which is basically a safety net so that if a deal can’t be agreed in time, it avoids the need for a hard border. The problem with this, is that if we agree to it, it does 2 things. Firstly it splits the UK which is understandably not acceptable to either the UK government or the DUP. Secondly, it effectively keeps the UK in the customs union indefinitely, which would give the EU no impetus or motivation to negotiate a trade deal, while severely limiting any trade deals the UK could make elsewhere, which is arguably the main benefit of leaving the EU.
If the backstop is rejected tomorrow, then it leaves few options. The UK position is a mess, as rather than support what is best for the UK, political parties are using the uncertainty to score political points and trigger either a general election or another referendum, both of which would simply increase the uncertainty that has been keeping Sterling weak.
This week then, is crucial for what will happen moving forwards, and it will carry the fortunes of the Pound along with it. If a deal is agreed, then I would expect the Pound/Euro rate to rally through the €1.15 mark and potentially higher. If however they kick the can down the road to November, then the Pound is likely to drop back to around the €1.11/€1.12 mark. Either way, by the end of this week rates are likely to be rather different to where they sit now.
How to protect against rates moving against you
If you need to buy currency with Sterling, then any failure to agree a Brexit deal this week is likely to cost you. In this scenario you can consider either a Stop Loss order or Forward contract. A stop loss triggers an order to convert your funds if the rate drops below a pre-agreed level, protecting you against the rate plummeting. A Forward contract allows you to freeze the current rate for up to 12 months, removing your exposure and allowing you to budget. To secure a Forward contract you lodge 10% of the total as a deposit against the trade.
Other clients may be looking to convert Euros or another currency back to Pounds. With so much uncertainty over which way rates will go, again things like Stop and Limit orders can be utilised to help you take control of what the market is doing.
Another popular option at the moment is to hedge your bets, and convert a portion of what you need to convert now, e.g. 60%, and then take a gamble on the rest. This gives you some level of protection regardless what the market does, and removes your exposure to the currency markets.
Get in touch for a free currency consultation
If you would like to discuss your currency requirements with an expert, feel free to get in touch with us today. The authors of this site have been helping Private and Corporate clients navigate the currency markets for over 13 years. We offer a free consultation to any clients that want to discuss what rates are doing, and to learn about the different options available to help get the best rates.
We can also offer you a free quote so you can see how much you could save. Our rates are up to 5% better than your bank or existing broker may be able to offer. We also allow you to see trading rates online, and places trades using our online platform 24/7.