Bracing for Impact: How to Prepare for All Eventualities of Brexit
The March 29th Brexit deadline has come and gone and yet the future of the UK’s departure from the European Union remains just as unclear as it’s always been.
EU leaders granted Prime Minister Theresa May an extension from the original deadline but not to the degree May initially requested, aiming for a delay until June 30th. Now, the clock is ticking yet again after EU officials have given May and British Parliament until April 12th to get their act together.
Back in London, UK lawmakers said “no” (again) to four alternatives to May’s deal. At the same time, however, the British House of Commons also rejected the idea of leaving the EU without a deal altogether. And yet, if no consensus is reached between the parties involved, some are seeing the possibility of a no-deal Brexit as a likely outcome. Though many lawmakers have been vocal about their preferences for a soft-Brexit, one alternative voted on in the House of Commons at the beginning of April that would allow for withdrawing from Brexit, should the UK find itself crashing out of the EU with no deal, was defeated 292-191. Backing out of a hard Brexit before the deadline is not going to be on the table.
For the time being, April 12th is now the most important date for the future of UK-EU relations as it also marks the deadline for the UK to decide on whether to hold European Parliament elections. If nothing happens with May’s deal by the 12th, the UK will need to decide between: 1) Leaving the EU with no deal, 2) Cancel Brexit altogether, or 3) accept a longer extension from the EU and hold European parliamentary elections. Considering May’s past experiences attempting to convince British lawmakers to accept deals in the past (now rejected threetimes), anxiety over the upcoming deadline is prevalent.
Among all the back and forth between May, UK Parliament and EU officials, concerns continue to grow and amplify for both British citizens and business owners. Trade relations and exchange rates are two of the top priorities as they’ll affect British economic activity and people across the country. Let’s take a deeper look at the three potential outcomes and what they all mean for business and Britons alike.
A No-Deal “Hard Brexit”
Though not the preferred outcome for many in the UK, Britons must take the possibility of a hard Brexit seriously. The lack of consensus between May and lawmakers means that especially businesses should brace for impact in case a no-deal departure. Principal among the concerns for many is the future of the pound and what implications that brings with it. If the UK does end up departing from the EU without a deal passed, experts agree that sterling is likely to suffer significantly as a result. Before the most recent drama, the GBP had been trading strong against the EUR and USD despite concerns over Brexit. At the time, traders had a more optimistic attitude about the likelihood of some arrangement being worked out.
However, now that May is scrambling for more time and Parliament is not cooperating how she’d like, traders aren’t so sure anymore. In the event of a hard Brexit, foreign exchange experts anticipate sterling to plummet compared to its past performance. In a Reuters poll of foreign exchange strategists last month, respondents said that a hard Brexit could result in a staggering 9 percent drop for the GBP down to $1.20 against the USD. When translating that decline over to European markets against the EUR, things only get more concerning with the GBP being crushed closer to parity with the EUR.
Cancel Brexit Altogether
Another possibility, though considerably less likely, is the potential for the UK to cancel Brexit completely. May has stated in the past that she’s not entertaining such an outcome as it would adversely affect the trust of the British people and their relationship with their government, but that doesn’t mean it’s impossible. In fact, just last month a petition to revoke Article 50 and cancel the entire Brexit drama garnered more than 6 million signatures, making it the largest petition to date and even crashing Parliament’s website at one point. With such a successful petition, the topic was bound to be debated by officials. However, the government’s response was in line with past statements, saying that:
“It remains the Government’s firm policy not to revoke Article 50. We will honour the outcome of the 2016 referendum and work to deliver an exit which benefits everyone, whether they voted to Leave or Remain. Revoking Article 50, and thereby remaining the European Union, would undermine both our democracy and the trust that millions of voters have placed in Government.”
In the unlikely event of the entire Brexit process being canceled, there’s really no telling what’s likely to happen for sterling. While many may see such a development a positive since the UK remains in the EU, there’s an additional political factor added to the equation. Should Brexit drama take an unexpected turn in this direction, there’s no telling what happens to GBP, though at least a short-term bump is likely as the UK narrowly escapes the crisis scenario of a no-deal divorce with the EU.
Longer Extension and a Deal (Finally)
The last potential outcome is the EU granting the UK more time, the UK holds European Parliament elections, and the government is able to finally work out a deal that can be agreed upon. Even though the GBP was crushed in the markets following the initial 2016 referendum, sterling is much less likely to suffer in this outcome given recent events.
Since the 2016 referendum, the focus has shifted not on whether a Brexit will happen or not, but more on how such an exit will look. While a no-deal scenario paints a picture of crisis and economic uncertainty, a delayed deal is likely to offer the exact opposite. Should officials finally reach a consensus and get a deal agreed upon, then markets could be looking at a gain for the GBP potentially upwards of 5 percent.
Preparing for Brexit
With the constantly shifting environment of Brexit talks, negotiations, voting and rejections, there’s a lot to consider about the economic future of the UK and sterling. While a no-deal hard Brexit once seemed like a far-fetched possibility, the scenario is now appearing to be more and more likely. Should a hard Brexit actually happen, then there are even more implications for those conducting cross-border business and people who have property in the EU.
One area of concern in particular is exchanging currencies in a post-hard Brexit outcome. Regardless of what trade deals are reached and agreements made, Britons are still subject to market rates for exchanging GBP and EUR. Considering the increasing likelihood of a no-deal departure and the steep decline of sterling, that means some of the most unfavorable exchange rates in years.
With that in mind, Brits are at a disadvantage when exchanging money, making payments across borders and shopping internationally. Fortunately, there are tools available to help mitigate the potential damage. In the same way that many Brits are bracing for Brexit by stockpiling essential goods, the same mindset can be used for their money.
International money transfer companies and other financial institutions offer consumers access to forward contracts for currencies. In currency exchange markets, a forward contract ensures that the buyer gets a guaranteed rate of their choosing when exchanging currencies in the future. A forward contract can act as insurance against the uncertainty of sterling’s value in the near future. There are a lot of options available, but consumers can get a better idea of what’s offered by looking at MoneyTransferComparison’s Top 10 list for a full breakdown of what each company offers before making any decisions.
Forward contracts can be an immensely important tool when handling exchanges after a disaster scenario like a hard Brexit. The Irish Central Bank has already issued warnings about the potential for a more than 10 percent drop following a no-deal leave and near parity of the GBP with EUR. According to the bank, such a move could result in business closures, especially for those with little capital heavily reliant on exports. For individuals, that means an automatic 10 percent markup on anything purchased outside the UK and a significant loss when exchanging currency. Alternatively, forward contracts can lock-in a much better rate today rather than being dependent on the market in the future.
By taking into account all the possible outcomes of the current Brexit situation, Brits are able to start properly bracing for impact. Between a potentially declining sterling, possible limitations on imports and uncertainty about the political future, there’s a lot to keep track of. Yet, by taking the necessary steps ahead of time, anyone can be ready for whatever is thrown their way. With another tight deadline looming over the future of UK-EU relations once again, make sure you’re prepared for whatever the outcome may be come April 12th.