Brexit: Consider the scenarios of the movement of the pound with Brexit and in the absence of a transaction

The euro fell slightly in the morning, but then regained its position after the release of good fundamental statistics for Germany and the Eurozone.

The canceled speech by the President of the European Central Bank was replaced with only a few comments by the regulator, in which the ECB warned of growing risks for the eurozone financial sector, including the tense situation in international trade, problems of emerging markets, as well as concerns about the high level of debt.

The bank is also concerned about the Brexit scenario since a sharp break in relations will necessarily threaten financial stability in the eurozone.

Basic data

As I noted above, the German labor market continues to leave faith in the good economic performance of the flagship eurozone economy by the end of this year.

According to the Federal Employment Service, the number of applications for unemployment benefits fell by 16,000 in November compared with the previous month, while economists had forecast a decline of 10,000. The employment service said that high labor demand among companies persists. The unemployment rate in Germany in November fell to the level of 5.0%.

A good report on the confidence of eurozone companies in November of this year also supported the euro. According to the European Commission, the sentiment index in the eurozone economy in November of this year fell only to 109.5 points from 109.7 points in October, while economists had expected a decline to 109.0 points. As noted in the report, a slight decline in November was due to weaker consumer confidence, while sentiment in the services sector and the construction sector in the eurozone remained unchanged compared with October.

In the afternoon, all market attention will be focused on the minutes of the Federal Reserve meeting, which took place on November 8. In the protocols, traders will carefully study the views of the Central Bank's executives on the economy, which will allow a detailed understanding of their plans for raising interest rates in the future.

Yesterday's speech by Fed Chairman Jerome Powell diminished enthusiasm a little. Powell said that the current interest rate is only "not much lower" than the neutral level. This suggests that the pace of tightening monetary policy next year may significantly slow down, and this will adversely affect the US dollar rate. Many experts believe that the increase in interest rates can fully manifest itself in the economy only a year or even later.

At the last meeting, the Fed leaders voted to leave the key rate in the range of 2% -2.25%. Let me remind you that many economists expect an increase in interest rates during the meeting, scheduled for December 18-19.

The British pound fell today after the report of the Bank of England, which did not clarify the situation, but only indicated that in the absence of an agreement on Brexit, the problems of the UK economy will be very serious.

The management of the bank believes that the rates will not necessarily automatically follow the trajectory specified in the Brexit scenario, and the actions of the bank with respect to interest rates will depend, in general, on how much supply and demand are affected.

As for the scenario, if an agreement is reached on close ties between the UK and the EU, the British pound is expected to grow by more than 5%.

But the scenario in the absence of such an agreement could lead to a drop in the pound by more than 15% and more than 25% in the case of disorderly Brexit (destructive and disorderly exit scenarios imply the absence of an agreement on Brexit and a transition period).

Also, the Bank of England fears that in the event of a disorderly Brexit, a sharp jump in inflation will lead to the fact that the interest rate reaches a peak of 5.5% rather quickly, which will slow down the development of the economy.