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#1 25-06-2020 18:38:01

johnedward
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From: Paris - France
Registered: 21-12-2009
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GBP: the rise and fall of the British pound

GBP: the rise and fall of the British pound


A recent article in London's Financial Times reveals the declining role of the British pound and its appearance as an emerging market currency. It states that the declining role of the pound in the international financial system reflects a declining UK economy.

This isn't really new, but it is an offshoot of the GBP's steady decline. And after this Brexit situation, Britain will have a currency with less of a global influence.

Future challenges for the British pound

150 years ago, the pound was the currency that all investors wanted. The stability of the pound was the basis of the UK's wealth, and its steady decline reflects the shrinking British influence on the world stage.

Once a powerful reserve currency, it has recently come to play a regional role. Not so long ago it was one of the most widely traded currencies, along with the euro, the JPY and the USD, but that's no longer the case.

The implied volatility of the pound has steadily declined since the Brexit vote. It makes it look like much smaller markets and shows how the influence of the City of London has faded in the years following the national referendum.

The explanation for investors' avoidance of the pound comes from uncertainty about future UK-EU relations. After all, this is Europe, and the two economic blocks (the EU's single market and the UK market) need to find a way to coexist and, more importantly, to trade. Trading opens up savings and comes with a list of benefits that far outweigh its costs.

In a Brexit without a market, the risk is that the pound will further lose its sphere of influence. It could fall to parity with the euro and to 1.09 or less against the USD.

Traders have a deadline to meet: this coming December. If no permanent free trade area (FTA) is agreed upon by new year's eve, the risk of a "no-deal" becomes a reality. The closer we get to this deadline without a major breakthrough in the negotiations, the more likely it is that traders' appetite for the GBP will diminish.

Until Brexit becomes a reality, traders should be careful about any long GBP positions.

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