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Political impact on exchange rates

The GBP/EUR exchange rate spent 2017 reacting to political news and Brexit developments... What impact are the negotiations likely to have on the exchange rate in 2018? F.M.

While it was not as dramatic as 2016, 2017 was volatile, affected by the calling of the UK election (which saw the pound rise), a slump as the Tories lost their majority, and then pressure on the pound due to fears that the talks were going too slowly.

Ripples caused by these are likely to have further consequences over the coming year. One focal point will be whether the UK PM Theresa May clings to her position amid mounting pressure in her party. A leadership contest could have major consequences for sterling and the Brexit negotiations, especially if it leads to another election and a possible return to power for Labour. Markets fear that an unstable government will undermine the UK’s position in negotiations so any hints of this are likely to weigh heavily on sterling.

This will also tie into the pace of Brexit negotiations, with any suggestions that talks are progressing slower than markets would like having the potential to drag on the pound. The area of talks under the most scrutiny is likely to be trade with observers keen to learn what a post-Brexit trade deal between the UK and EU will look like.

Markets are also likely to pay attention to whether the UK will be able to secure a transitional agreement, with analysts hoping such a deal would help cushion the impact of Brexit for British businesses.

A brighter outlook for the UK’s post-Brexit future could also strengthen the pound if it causes the Bank of England to reconsider its interest rate plans this year, with the pound likely to surge as it did last September if the bank hints at a possible rate hike in 2018.

Whatever happens this year, signing up to receive regular market updates from a currency broker and staying up-to-date with the latest currency news could help you make the most of your transfers.

Question answered by Pippa Maile of Currencies Direct. For more information on international money transfers with Currencies Direct see or call +33 (0)4 22 32 62 40

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