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All eyes were on the pound on Britain's official Brexit day.Reuters

The pound rises as the UK bids goodbye to the EU — but experts say to brace for a drop of up to 7% if trade talks fail

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The British pound was trading slightly higher on Friday morning as Britain prepared to leave the European Union.

Business Insider talked to numerous analysts and currency experts who saw the currency hitting close to $1.40 by the end of the year.

After 3 1/2 years of negotiations and political uncertainty, Brexit is set to take place Friday at 11 p.m. London time. While pro-Brexit campaigners will be busy celebrating Britain's exit from the European Union, traders and analysts will be busy watching the pound. 

Numerous analysts told Business Insider, however, that the initial reaction to the pound might be quite muted since the currency market had already priced in the exit. What comes next is the trade negotiations with the EU — and any uncertainty on that front could see the pound falling in the longer term.

"A 0.35% rise to $1.3139 puts the currency almost back to where it was at the start of the year, but still some way short of the $1.3335 level seen just after the general election result in December," Russ Mould, the investment director at AJ Bell, said in a research note on Friday.

The British pound has had a roller-coaster ride since the UK voted to leave the EU on June 23, 2016. The currency plunged from the highs of $1.50 to a 31-year low of $1.32 on the night of referendum and continues to trade 12% lower since then. 

Some analysts also said that the slight rise in sterling on Friday was on the back of a hawkish Bank of England rate hold on Thursday and that the year 2020 could be positive for sterling. 

"2020 will be an opportunity for the investor community to begin building sterling longs, in light of what could be a favorable turn in sentiment as the UK close the chapter on Brexit and look forward to a renewed future," Bethel Loh, a macro strategist at ThinkMarkets, told Business Insider. 

A close eye on March 3

While the UK continues to remain a member of the single market and customs union till the end of the year, the uncertainty now remains whether the two sides will be able to sign an agreement on the next steps. Investors will be keeping a close eye on March 3, when the UK and the EU are scheduled to start their trade talks. 

"There remains the threat of no deal and investors will be made acutely aware of this as the year progress — coming to potential mini-climax in June, when the two sides will need to be confident of agreement in time for Christmas," Neil Wilson, the chief markets analyst at Markets.com, said in his morning note.

Jeremy Stretch, the head of G10 FX at CIBC, said optimism over a trade deal needed to be kept in context. 

"For the year as a whole we do assume a higher value of Sterling by year end, but the near term outlook could prove challenging," Stretch said. "We anticipate that sterling will end the year at $1.38 but the gain is at least partly by virtue of a lower USD."

What happens if negotiations fail?

"I assume the negotiations will not fail, but rather we end up with something akin to the US and China deal, namely a phase 1 deal sealed in the time line with the thornier issues kicked down the road," Stretch said.

He warned, however, that if trade negotiations failed and the UK ended up with a delayed hard exit, "we would look for GBP USD to drop 5% to 7% taking us back towards $1.24."

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