A weak US dollar and rising hopes for a trade deal between the European Union and Britain helped Sterling rise on Tuesday afternoon.
Analysts are now saying that the pound could rise further in the event of a post-Brexit trade deal. This, of course, is something we have seen every time that there was any positive news pointing to a breakthrough to the negotiations. Sterling fell immediately after the UK referendum vote to leave the EU in June 2016, as political uncertainty hurt the pound. Since then, Sterling has been volatile every time news was released regarding Brexit and has fallen on news of a stalemate in the negotiations or disappointing updates from both sides. As we are nearing the end of the Brexit transition period, and the possibility of an agreement appears more certain, the pound will most possibly react positively and rise.
A possible agreement by mid-November will support the pound
Optimism regarding the trade talks has risen recently after the EU’s negotiating team and Michel Barnier the EU’s chief Brexit negotiator said that they will resume talks in London until Wednesday 28 October and many reports have noted that an agreement could be reached by Saturday, 31st October 31.
Any time from now until the middle of November, when a possible deal might be reached, Sterling could strengthen as long as the two sides ensure that a no deal scenario is not in the cards.
By reaching an agreement, both sides will provide certainty to businesses and investors, eliminating uncertainty, restoring sentiment and offering relief to the pound.
USD weakness to support the pound
For many analysts, the pound might rise, but this might not be a sharp rise and it will only be the result of a depreciation of the USD. At the same time, they predict that a strategic buying of Sterling in anticipation of a deal being reached might be possible, but this will be short-term.
According to Pound Sterling Live, Rabobank see potential for the GBP/EUR exchange rate to rise if a Brexit deal is announced, but such a rise will be limited. Jane Foley, Senior FX Strategist at Rabobank said: "We don’t expect that relief at the end of the Brexit process will be sufficient to divert attention away from a poor set of UK fundamentals," she adds.
"If we are wrong on the market’s assigned relative probabilities, then Sterling will move more or less than we expect. Given the better mood music of recent weeks, risks appear skewed in favour of a smaller move,” Paul Robson, Head of G10 FX Strategy EMEA at Natwest Markets said. But they also highlighted the issues lying ahead, including that of companies having to adjust to the new realities after Brexit and the potential disruptions in various sectors, including the auto industry that were recently highlighted by the automobile sector.
Potential threats ahead
Economists are emphasising the fact that Brexit will not only disrupt various industries and create uncertainty about the future of businesses, but it will add to the UK’s existing problems. The economy is currently hit by Covid-19, government finances are deteriorating, and lockdown restrictions are hurting the economy further. With a weak economy and limited investment flows, the pound might have a rocky road ahead, with or without a Brexit trade deal.
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