The UK’s decision to walk away from the European Union caused the country to split down the middle, with both sides arguing as if their lives depended on it.

In June 2016 the result was in, but the arguing didn’t stop. In fact it carried on right until Prime Minister Boris Johnson signed the historic deal at Christmas to maintain trade relations with the EU without allowing freedom of movement.

Economists have argued the case for both staying in and pulling out. So it’s almost impossible for the layman to have an accurate idea of the big picture if the experts disagree. 

Currency movements are a different matter, though. It is much easier to correctly forecast a currency pair than a complete economy. We wonder just how well will the pound fare against the euro and dollar in a post-Brexit world.

Currency Challenges

Within hours of the UK voting to leave the naysayers were screaming for the rooftops that a monumental error had been made. Pound sterling lost more than 10% of its value and people were starting to panic until it finally stabilised. 

The pound hit a 30-year low against the US dollar and it looked like worse was still to come. EU aficionados must have been loving what they were seeing. 

It’s a fact that any predictions that were made more than 12 months ago might now be resigned to the bin. Predicting the future of the pound in a stable world is one thing but trying to do it during the COVID-19 crisis is quite another.

When the Brexit deal was signed the reaction in the markets was positive, but not by as much as was hoped. The strategists at Goldman Sachs  had long-held a bullish stance on the pound but in the new year they have backtracked slightly, citing a “disappointing reaction to the signing of the deal”.

Zach Pandl, an economist at Goldman Sachs said:

"We are closing our trade recommendation to go short EUR/GBP at a small potential profit, but well short of our initial 0.87 target, which we had thought could be achieved once the UK and EU secured a post-Brexit trade agreement."

COVID-19 was thought to be the dampener at work here, and with no precedent in living memory it is difficult to know exactly what the real situation is.

Pandl continued:

"But it is also true that the Brexit deal is relatively narrow in scope and activity will continue to face a number of headwinds over the coming months. As a result, and with the main catalyst now behind us, we are taking a step back to reassess our Sterling views for the post-Brexit world." 

The political turmoil of Brexit is expected to wind down rapidly. Already many of the predicted issues have failed to materialise. The Dutch customs might think it’s humorous to be confiscating a truckers packed lunch but in reality everything is moving as smoothly as before.

Thomas Flury, strategist with UBS Switzerland AG, predicts that as the global economy recovers the attractions of the British pound in a post-Brexit world will become more apparent to potential investors.

Not a Clear Road Ahead - Factors Affecting the Pound

It is thought that the vaccine rollout is having a positive effect on the value of the pound, but nobody knows by how much. The United Kingdom’s program is performing well compared to their European neighbours and fudging the pound’s performance. This is obviously a temporary advantage and for now there aren’t any predictions on how much the pound will suffer when the euro and dollar fight back.

There is new data that suggests the pandemic might have peaked in London. This shows the lockdown approach has indeed worked and the UK can expect to be getting back to normal by the summer for the most part.

Andrew Bailey, Governor of the Bank of England, has backtracked on his talk about the possibility of negative interest rates. He said they are "controversial" and have "a lot of issues", and any decision about stimulus for the pound will come after the lockdown ends and more is known about the real effects of Brexit.

The future doesn’t look bad for the British pound. It might take many years to get back to its value last seen before the Brexit referendum, but the rot has stopped. A more pressing question is how well will the dollar and euro fare against the pound in a post-COVID-19 world. The USA is going through political turmoil right now and the economic situation in the EU hasn’t been booming for a long time.