The British pound can be hit once against for a second time because of Brexit.
According to analysts, if the United Kingdom has to leave the European Union next year without a proper Brexit deal, there can be severe pressure on the currency.
“The day after the UK voted for Brexit, the pound suffered the biggest single day loss for a G10 currency in recorded history,” said Fiona Cincotta, a senior market analyst at online trading platform City Index. “The pound could potentially replicate this decline.”
The pound was hit soon after the Brexit vote ensured the UK leaving the EU. It had then hit a low of $1.18 against the US dollar in late 2016. Since then there has bene some recovery in the currency but it has fallen to $1.27 against the dollar on fears of a hard Brexit.
The United Kingdom and European Union will manage to strike an agreement before the March deadline for Brexit, believes George Brown, an economist at financial firm Investec. But if there is no appropriate deal, the pound could fall below $1.10, he warned.
Fears in recent months that Britain could leave the EU without a transition deal to keep it temporarily in the bloc’s single market and customs union have risen because of the slow pace of negotiations.
One potential fall out of a hard Brexit is a sharp decline in the pound. There warnings of dire consequences have been issued by automakers, grocers and retailers in case they are not able to those deliveries from Europe that allows then to follow the “just in time” strategy for this supply chains.
Compared to the pound, there is expectations that the stock market would show subdued reaction.
“The stock market is less susceptible to a no-deal outcome than the pound,” said David Cheetham, chief market analyst at brokerage XTB. “While there may be a knee jerk reaction lower of 2% to 3%, it is unlikely to experience a large loss.”
Prices could be supported because of a weaker pound which would make purchasing British stocks cheaper for foreign investors.
Miners and oil companies abound in the largest of the companies in the benchmark FTSE 100 and these companies generate a large portion of their revenues from outside of the UK in foreign currencies. And there when foreign sales are translated back into pounds, the earnings of these companies would be boosted.
However, there are many firms that would face the consequences of a weak pound.
“Companies which service the domestic market and are most reliant on imports would likely be hardest hit in a no-deal Brexit,” said Jonathan Davies, head of currency strategy at UBS Asset Management.
There would be increased costs of importing materials for British retailers and manufacturers because of the weaker pound and increased tariffs, Cincotta said
“Industry-wise, soft drinks, alcoholic drinks and packaged food industries are the most sensitive to the impact of Brexit,” said Ugne Saltenyte, a macro analysis specialist at research firm Euromonitor International.
Travel companies and airlines may also take a hit, Cheetham said. there can be flight cancellations because of Brexit and there can be increased tendency among Britons to stay back home to cope with higher inflation because of the weaker pound.
(Adapted from Money.CNN.com)