For the past couple years, the British pound has been largely reacting in response to Brexit headlines.
When British Prime Minister Boris Johnson and Irish leader Leo Varadkar met and indicated that they were hopeful of an agreement on the issue of the Irish border (a major sticking point for Brexit negotiations) the pound gained nearly 2.7% against the dollar. However, when, towards the end of the month, it became clear that Britain would not be able to meet the European Union’s (EU) October 31st deadline, we saw the pound weaken again.
Essentially, anytime we are given optimism for a Brexit deal, the pound gains strength. However, the currency loses strength at signs of a “no-deal” Brexit, which most experts agree would spell disaster for the British economy.
Unlike here in the United States, our friends across the pond can call for a general election whenever they want, and that is exactly what Boris Johnson has decided to do. The snap election is set to take place on December 12, and the EU has extended Britain’s Brexit deadline to January 31, 2020.
Johnson’s Conservative Party is largely running on a “Get Brexit Done” platform, so the fate of Britain’s withdrawal is now closely tied with their hopes for a majority. You may recall that Johnson’s predecessor, Theresa May, attempted a similar move in 2017, which ended unfavorably for the Conservatives and all but assured that May would not be the one to pass a Brexit deal.
Nevertheless, things seem to be looking up for the Conservatives this time around, but another defeat could mean a blow to the deal’s prospects and the British pound’s worth. Conversely, a victory for the conservatives has the potential to offer the pound a huge boost.
How to Plan Ahead
Amid such uncertainty, planning future British pound payments can feel a lot like gambling. While some investors are more than happy to try their odds, many businesses can’t afford to roll the dice. This is when hedging really becomes key.
With a Forward Contract, business owners can lock in a rate and know what they are going to have to pay several months from now, no matter what happens with the pound. Not such a bad idea when the outcome of this election could severely shake things up.