July 2015 seems an age ago for businesses with international payment requirements when the pound reached a seven and a half year high (€1.44) against the euro. Back then, even the most optimistic Eurosceptics couldn’t have predicted that an EU referendum was just months away – let alone the eventual outcome. In those halcyon days for the pound, the UK’s departure from the EU was just a pipe dream for the minority – or so we thought – and the B-word hadn’t even been uttered.
Just seven months later “Brexit” was fast becoming the most popular word in the English language, after David Cameron called an EU referendum – something he first promised back in 2013. The ensuing political and economic uncertainty triggered a turbulent period for the pound – from the Brexit campaign which culminated in the surprise Leave vote, through the unsuccessful negotiation process, to the present day when the words “no deal” are on everyone’s lips.
No deal Brexit
Today, any mention of Brexit is enough to make us break out in a cold sweat, as we’re bombarded with forecasts of ongoing economic doom and gloom. To make matters worse, our impending exit from the European Union (EU) is as confusing as it is worrying. So much so that most people would probably prefer to discuss quantum mechanics than try to understand the implications of Brexit.
This has been further compounded in recent weeks by the prospect of a no deal Brexit, which has since been blocked. However, the possibility of which remains very much alive, with Prime Minister Boris Johnson – whose political strategy hinges on the credibility of his threat to leave the EU, regardless of whether he reaches an agreement on trade, customs and immigration rules with the remaining 27 members – is now fully committed to making Brexit happen.
Why no deal is a possibility
Before we try to understand what a no deal – and its impact on the pound – might mean in practice for businesses with international payment requirements, let’s remind ourselves why it’s a possibility in the first place. Essentially, it stems from former Prime Minister Theresa May's failure to deliver Brexit, after her proposed deal was voted down three times by Parliament and the deadline was extended to 31 October. Mrs May subsequently resigned and was replaced in Number 10 by Mr Johnson – someone who’s prepared to leave the EU without a deal if it means we can "Brexit" on time. Now, the Brexit extension is looking to fall on 31st January and a no-deal is still in the mist.
How a no deal Brexit might impact trade
Many UK businesses are exposed to currency risk because they export goods or services to the EU. Under Mrs May's deal, the UK would have entered a 21-month transition period, during which trade would continue while both parties attempted to negotiate a future relationship. In contrast, a no deal scenario would see the UK leave the EU immediately without reaching an agreement about the "divorce" process, including a UK-EU trade deal. Consequently, the UK would separate from the single market and customs union overnight, potentially exposing UK exports to an extensive range of EU imposed checks and tariffs.
The UK government has already promised to abolish most tariffs on EU goods imported to the UK in the event of no deal. The EU, however, doesn't have to reciprocate. Many UK businesses have voiced concerns that this could make their goods less competitive, as trade with the EU becomes more difficult and more costly.
What might a no deal mean for the pound?
The pound – which fluctuates in value in response to political and economic events – has felt the weight of Brexit uncertainty for over three and a half years. This downward spiral has been accentuated in recent weeks, as the prospect of a no deal gathers pace courtesy of Mr Johnson’s stance.
According to the Bank of England’s monthly meeting minutes for August: "In the event of a no deal Brexit, the sterling exchange rate would probably fall, CPI inflation rise and GDP growth slow." Throw in Mr Johnson's attempts to call a snap general election after rebel MPs conspired to block leaving the EU without a deal, and things look increasingly bleak for sterling. So much so that it fell below USD$1.20 in early September to its lowest level in 34 years.
If the uncertainty and volatility caused by the prospect of a no deal weren’t bad enough for the pound, imagine the impact if it becomes reality. While nothing is certain in the world of currency markets, the pound is all but guaranteed to fall even further in value if the UK crashes out of the EU on 31st January – some analysts have even suggested it could reach parity with the euro and US dollar for the first time ever. Good news for businesses exporting goods to the US or EU – offsetting the financial impact of potential trade tariffs that could be imposed in the single market post a no deal – but bad news for those importing to these shores, as the cost of doing so rises.
The issue for businesses with exposure to currency risk is it’s impossible to precisely predict what will happen to the pound post-Brexit. After all, we still can’t be sure whether the UK will finally leave the EU on 31st January with or without a deal – with both potential outcomes likely to have a contrasting impact on the pound. During times of such heightened uncertainty, it’s, therefore, prudent to hope for the best but plan for the worst. For the pound – and many businesses – the worst means a no deal Brexit and a significant dip in value in the immediate aftermath and beyond.
As 31st January approaches, the need to protect your business’s international payments from further exchange rate fluctuations has never been greater. Fortunately, you can manage this currency-related risk with help from the experts.
Currency specialists RationalFX provide an award-winning service that is convenient, cost-effective and secure. From the expert market insight provided by your account manager to their specialist exchange tools, they can help your business stay in control of its international payments.
For example, with RationalFX you can secure a rate for up to two years using a forward contract. This means when your business enters into a contract with a customer or supplier, you know exactly what your revenue or costs will be, regardless of future market movements. What’s more, rather than adopting an all-or-nothing approach, you might leave room to capitalise on favourable market movements by only hedging a portion of your foreign exchange exposure using forward contracts.
For more information, speak to a currency specialist at RationalFX on (0)20 7220 8181 or email email@example.com.
George Roberts, Corporate Dealer, RationalFX is speaking at The London Group on 30th October 2019 about the benefits of being proactive with currency exposure and ways to mitigate the effects that an event like Brexit can have on the margins of a business.