Sterling has come under pressure again as trade talks between the UK and the European Union become increasingly fractious and the chances of a deal being made before the end of the UK-EU transition period on December 31 look more remote than ever.
Calm Before The Storm
So far, sterling has been relatively immune to rampant political speculation on the fate of the UK’s relationship with the EU. This is partly because sterling’s problems have been hidden by significant weaknesses in the US dollar, which has moved to new lows against other major currencies over the last few months as the US is battered by the COVID crisis.
There is also a suspicion that many currency traders have not yet fully accounted for the risks of a no-deal Brexit and continue to believe that the most likely outcome is that some sort of deal will be agreed between the UK and the EU before the end of December 31.
Lack Of No-Deal Planning
This lack of preparation for a no-deal scenario does mean that any impact of a collapse in trade talks on sterling could be swift and brutal.
Parity with the euro looks possible and while dollar parity does not appear to be on the table at present, there is every chance that the pound could sink as low as $1.10-1.15 following a breakdown in discussions.
This could also have a significant impact on the amount that the UK government is paying for debt.
COVID-19 has forced the UK government to take on huge amounts of debt in order to prop up the economy.
So far, this has been possible because the government is able to borrow money at incredibly low or even negative interest rates. A no-deal Brexit could spook the markets and push up the rates that the country is paying.
The debt burden on the UK government is currently so high that even a small change in the rates the country must pay in order to borrow on the international markets could be a serious problem for the government.