Sterling climbed against the dollar on Monday after the EU and UK announced that they will “go the extra mile” and continue with Brexit negotiations.
After last week, when the pound fell due to concerns over a no-deal Brexit, this week the pound rose reversing some of its losses. The Prime Minister Boris Johnson and European Commission president Ursula von der Leyen agreed during a “constructive” call on Sunday to “go the extra mile” in order to secure a trade deal for the UK. With no deadline for negotiations, British officials have said that negotiations could continue until Christmas.
What do analysts say?
Whatever happens to the pound is going to have an impact on Thursday’s Bank of England meeting which is expected to remain on hold. Analysts believe that if markets are worried and the pound falls on the prospect of a no deal, then the BoE might increase its QE purchases within a short period of time. Nonetheless, pound volatility as we near the end of 2020 is to be expected.
Goldman Sachs has predicted that the pound will rise if there is progress towards a deal or a no-deal Brexit is avoided. Barclays analysts explained that there will be risks to the pound until an agreement is reached. As the Financial Times reported, some analysts have changed their mind, quoting Gregory Perdon, co-chief investment officer at Arbuthnot Latham, who had “second thoughts” about the pound rising, but he reiterated his hopes for a deal as “both parties are probably better off economically with a deal.” “Let’s hope rationality wins in this instance,” he added.
Others more pessimistic, have warned that the pound’s gains might be short-lived, as both the UK and EU have failed to reach a deal repeatedly in the past.
Talking to Reuters, Junichi Ishikawa, senior foreign exchange strategist at IG Securities said: “This is a temporary move higher in the pound, but it is still not clear that a no-deal scenario can be avoided.”
Whether there is a deal or no deal, some investors feel that the pound could still move sharply.
The UK left the European Union on 31 January 2020, but the ongoing negotiations between the UK and EU officials are focussing on securing and negotiating a deal about the rules that will determine and define the kind of relationship the two parties will have post-Brexit. Michel Barnier has commented that Boris Johnson has made a mistake for hoping to negotiate an agreement within only 11 months.
The two sides have until 31 December 2020 to agree a trade deal and, if there is a deal, border checks and taxes will be introduced. The transition period ends on 31 December, and tariffs and quotas will be introduced in the event of a no deal.
A joint UK-EU statement stated that “despite the fact that deadlines have been missed over and over we think it is responsible at this point to go the extra mile."
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