The pound will rally as soon as there is progress with the Brexit trade talks. It might remain under pressure for the next few months, but as the Brexit trade talks progress and a deal is reached by October, then Sterling will likely begin to rise and get back on track towards a more sustained recovery. At the current moment, increased worries regarding a no trade deal will continue to put pressure on Sterling.
"Sterling has been somewhat caught in the middle between an appreciating Euro and a depreciating Dollar. As attention moves from the EU Recovery Fund possibly toward the ongoing Brexit talks we see potential for Sterling to rally on positive sentiment around those discussions. We continue to expect progress in these talks to open the door for an agreement likely in autumn. We also expect the UK economy to continue to catch-up with the rest of Europe," said Gaétan Peroux, Strategist at UBS.
For the time being, the impasse around the Brexit trade talks is not helping to support the pound, especially as the euro is growing stronger.
Brexit trade talks
With the trade walks remaining at a standstill, as both sides have agreed that significant disagreements remain, the market will remain cautious of the pound. The EU’s chief Brexit negotiator, Michel Barnier said: "By its current refusal to commit to the condition of open and fair competition, and to a balanced agreement on fisheries, the UK makes a trade agreement at this point unlikely.” However, both sides feel that they are coming closer to a deal in September or October, the latest. Therefore, market uncertainty will keep Sterling muted until the autumn.
Optimism for a Brexit deal
Charles Grant, the director of the Centre for European Reform, wrote in The Guardian, that he is optimistic about both sides reaching a deal. He said: “Failure is certainly possible. But a deal this year is more likely, for several reasons. First, there has been more progress than one might suppose from the public comments of Barnier and David Frost, the UK negotiator. The EU has hinted at a softer line on fisheries and state aid, and agreed that an arbitration mechanism rather than the European court of justice should adjudicate on disputes.” Things are also more positive in regards to the UK’s position as it has become more flexible, agreeing in staying in the European convention of human rights and to the EU’s demand for an “overarching structure encompassing various EU-UK deals, as opposed to a series of disconnected agreements (which the EU has with Switzerland and strongly dislikes).”
Grant argued that there is still time for both sides to resolve their differences, as the real deadline for a deal is mid-October. Additionally, the coronavirus pandemic has changed the political landscape and the possibility of a deal. It has increased concerns regarding the PM’s competence, and if 2020 ends with no deal, this will immediately reflect negatively on the government, especially with the ensuing chaos regarding the traffic of goods across borders. For Grant, this is important, and it might push Boris Johnson to show more flexibility.
Another reason that a trade deal needs to happen, and it is possible, is paradoxically a political one, rather than a financial or practical one, and that is to stop support for the SNP in next May’s Scottish elections. A no deal Brexit will increase calls for Scottish independence and will make Johnson’s job of having to block another call for an independence referendum, more difficult. In terms of Ireland, a no deal Brexit will create more issues with goods travelling from the UK to Northern Ireland as tariffs would need to be paid.
More importantly, a no deal Brexit will be devastating financially, and business leaders expect the government to be able to secure a deal by October. The PM has to deal with the competition as Labour’s Keir Starmer is a stronger figure than Jeremy Corbyn, more pragmatic and sympathetic to businesses. Johnson’s government would need to remain united around Brexit and strive for a deal as it will be economically and politically disastrous if a hard Brexit happens. For Grant, the biggest impact of no deal would be political: “An acrimonious end to the transition would hit economic confidence and make it very hard for the UK and the EU to build close cooperation on trade or security for years to come.”
While political and economic conditions remain unstable and the pound will be under pressure, Grant’s commentary offers an erudite addition to the ongoing discussion on Brexit and its economic implications. Indeed, his political intervention coincides with financial strategists and market experts’ point that a Brexit deal is necessary for things to get back on track. Only then, will the pound achieve a sustained recovery.
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