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Pound slumps as Brexit deal fears grow


Liam Sheasby, News Editor
8 Dec 2020, 10:31 a.m.

The Pound fell against the US dollar and the Euro yesterday following concerns aired by negotiators that a deal between the UK and EU over Brexit was once again looking less likely.

Sterling fell to $1.338 (€1.104), having recovered slightly from $1.323 (€1.094) earlier in the day, but many involved in the process are wary that the deadline to agree a deal – and indeed the Brexit deadline itself – is very close.

It was only last week, December 4th, that the pound registered its best performance against dollar since May 2018. Half of the gains were at the expense of the US dollar, following poor jobs data in the States, and half were also tied in with Brexit deal optimism – optimism that the Reuters news agency and Ireland's RTE now report has quickly dissipated.

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The Sun newspaper ran the headline yesterday about how Prime Minister Boris Johnson is very much set to walk away from negotiations with the EU, with the two parties still failing to agree on the same points about trade and fishing that have hindered talks for the past four years. Such a story, and indeed the headline, could be seen as political posturing from the UK government to call the EU's bluff. Whether it will or not remains to be seen.

What is known is that ever since the UK voted to leave the EU and began the processes required to leave, the strength of the pound has fluctuated depending on the degree of trade deal on the table and the alterations to trade being proposed. Given that any potential deal at present is still a Hard Brexit, it should come as no surprise that there will very likely be further losses for the pound as trade difficulties around imports and exports become apparent in the new year.

Speaking to The Guardian, Thomas Pugh (Capital Economics) believes that a Brexit deal is priced in, and that failure to secure a deal with the EU could cause a sharp fall in the pound's value; down from $1.33 currently to as low as $1.15 or even $1.10.

As if to rub salt in the wound, the UK's national debt was reported as of November 20th at being the highest figure since the 1960s. Debt burdens scare investors, as they worry about the repayment of said money. Governments are generally trustworthy, but economic hardship and a slow recovery can mean losses. Many investors will be wanting to know how the UK government intends to recover from the Covid-19 pandemic and the impact of lockdowns on economic activity, as well as how it will handle the necessity of printing money to fund the furlough scheme.

Money printing dilutes a currency pool, weakening its strength. The European Central Bank has done two rounds of printing, while the Bank of England looks set to do a second round imminently and the Federal Reserve is holding off until January's presidential inauguration. If the BoE prints more money, on top of the rapidly rising debt figures, there's a strong chance the risk involved will deter investors in the short to medium term from backing the pound sterling. These losses, should they come to pass, will lower the value of the pound and increase the cost of living. This means an increasing price for goods, services, and assets – which includes gold and silver bullion.

2020 and the pandemic may soon be over, but 2021 and the aftermath could be a tall order and a slow progress for recovery.

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