Above: Lead Brexit negotiators Michel Barnier, David Davis © European Union, 2017 / Source: EC - Audiovisual Service / Photo: Lukasz Kobus

There may even be a case for recommending a Sterling put due to a win-win for the Pound on Brexit, however hard or soft the final conclusion is.

The overwhelming consensus concerning Sterling's outlook is that a soft-Brexit is good for the Pound, a hard-Brexit is bad.

However, the foreign exchange market works in mysterious ways and at Pound Sterling Live we therefore believe it right to give as many views as possible to help those with FX-related decisions to be prepared.

That is why we believe there is the argument to be made that Sterling might actually be a winner of a hard-Brexit.

Always be Prepared for the Unexpected: The Example of the Dollar and Trump

The example of America might make traders think twice about selling the Pound in the eventuality of a hard Brexit.

Initial talk of a protectionist trade policy in the US in the run-up to the last presidential election was interpreted by most currency analysts as negative for the US Dollar.

The argument went something as follows: limiting foreign imports would impact negatively on the competitiveness of US firms hurting the US economy and weakening the US Dollar.

In the end, the opposite actually happened - the Dollar rallied, and although it could be argued this was as a result of expectations of greater fiscal stimulus a part of it was also due to an expected reduction in imports due to the tougher stance on foreign trade.

From a simple flow perspective, and leaving out the theorising about 'competitiveness of the US companies', it would seem that a more protectionist trade stance, in a country with a trade deficit at least, would logically result in a stronger rather than a weaker currency since less local currency needs to be sold to buy less foreign imports.

In the end, this seemed to be the argument that drove the Dollar higher, not the more abstract competitiveness one.

An Adjustment in the UK's Trading Position

It's not stretching the comparison too much to argue that a similar case could be made for the impact of Brexit on Sterling, and while the consensus and past experience seem to indicate a hard Brexit would result in a plummet in the Pound, it's worth considering counter-arguments too.

There may even be a case for recommending a Sterling 'put' due to a win-win for the Pound on Brexit, however 'hard' or 'soft' the final conclusion.

Like the U.S., the U.K. too has a trade deficit so any impediment to trade is likely to hit imports disproportionately and this is likely to hurt the Euro more than the Pound.

The UK imports considerably more than it exports to the EU - about 20% more in fact - so if there is a hard Brexit and trade volumes suffer, it would be the UK's reliance on imports that would adjust.

Therefore, demand for Euros would ultimately diminish impacting negatively on the EUR leading to a rise in Sterling eventually.

The adjustment would however occur over a long time period and be relatively painful as U.K. consumers are faced with expensive imports which in turn encourages them to seek domestic alternatives.

In addition, remittances from EU nationals working in the UK will fall as immigration drops of a cliff-edge, and this too, whilst a relatively minor piece of the pie, could still, nevertheless, be a contributing factor, as there is likely to a be a relatively sharp decline in remittance flows during the first year post-Brexit when the borders slam shut.

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Certainty is Sterling's Best Friend

The Pound famously suffered heavily after the EU referendum as markets bet that the sudden surge in uncertainty would hit business investment decisions.

Uncertainty, to this day, remains a key culprit in Sterling's valuation with analysts saying the more uncertainty that is removed, the better the environment for the Pound becomes.

And once the final Brexit decisions have been made the uncertainty premium will also disappear even under a hard-Brexit scenario.

The 'not knowing' what the final trade relationship will look like is the thing holding back investment decisions, rather than the final form the deal will take, and although as hard Brexit is more likely to result in 'no' than 'yes' from the perspective of major decision-makers, the lifting of the veil of uncertainty will still nevertheless be a relief.

More likely, there would be a detailed trade deal of some sort instead of the vast unknown currently filling the void.

All in all, it could be argued that even a relatively hard Brexit might actually not be such blow to Sterling purely from an uncertainty principle.

Corporate Flows

In the event of a hard Brexit, many companies with operations in the UK will leave because the UK will not be able to provide these companies with a gateway into Europe, and this will be bad for the economy say anti-Brexiteers, and result in a weaker Pound.

Assuming this is true, then it might not be negative for Sterling from a pure flows perspective, since it would result in those companies not repatriating profits back to their bases abroad any more, thus reducing Pound selling and demand for foreign exchange.

Nor would treasury managers in those corporations be likely to make final repatriations immediately after Brexit as - assuming the consensus is right and the Pound falls - they would not want to repatriate at a loss so they'd probably wait for Sterling to recover.

Again, it could be argued from a flow perspective the Pound would have more to gain than lose from foreign companies leaving - at least in the short-term.

Meanwhile, the UK's own corporate sector would probably be relatively unaffected by Brexit, and given the disproportionate international reach of UK corporates, their own repatriation flows back into the UK would continue and steeply outweigh falling outflows, resulting in consistent demand for the Pound.

In addition, because of UK multinationals, the UK is uniquely placed to benefit from the global upturn.

This explains why the FTSE is negatively correlated to the Pound and when the Pound falls the FTSE rises: a weaker Pound increases company profits via the exchange rate.

Finally, although the Pound dropped over 10% overnight after the referendum due to traders fears for the economy, the currency has bounced back as the economy has remained relatively resilient.

The question is, does this unexpectedly strong performance mean traders will be more hesitant to sell the Pound over coming months for the same reason?

Taking the arguments above to their logical conclusion a case could be made for the Pound to remain unexpectedly resilient - even rise after a 'hard' Brexit.

Since the same could also be said for a 'soft' Brexit it may be the case that the conclusion to Brexit offers traders a win-win bet on the Pound but timing is everything as any gains following a trade adjustment following an hard-Brexit is certainly likely to occur over a longer-term timeframe.

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