According to a media survey of nine strategists, under the impact of a no-deal Brexit, the pound could plunge 5% against the dollar, falling to 1.2500 by the middle of next year, as a no-deal Brexit would exacerbate the economic impact of a new epidemic outbreak.
At present, the market generally expects a deal to be reached between the UK and the EU, and according to the survey, respondents believe the likelihood of a deal is 70%. If a deal is reached, the pound will likely appreciate another 2.5% and the pound-US pair will rise to 1.3500, the highest level since late 2019.
The media are much more optimistic about the results of the strategists’ survey than they were in June, when respondents expected the pound to fall to 1.1800 against the U.S. dollar if no deal is reached, while the August 2019 survey was even more dramatic, showing that the pound would fall to 1.1000 after a no-deal Brexit, its lowest level in more than 30 years.
Currently, the UK-EU trade talks have entered a “make-or-break” moment, with both sides locked in a summit of EU leaders on November 19, which is believed to be the de facto deadline for both sides to break the deadlock. If there is a result then, the European Parliament will have sufficient time to approve the agreement before the end of the year.
But it’s worth noting that the U.K. and Europe seem to have left themselves a back door, and if they can’t come to an agreement on Nov. 19, there may be another chance next Monday, sources said, adding that officials plan to announce a breakthrough as soon as Monday, but no specific date has been set.
In addition, according to media reports.
“The U.K. and the European Union may reach an agreement on the future trade and security relationship early next week, with a gradual convergence of their positions on key negotiating sticking points.”
But sources also warned that the talks could still break down, as the two sides have been unable to come to terms on certain issues since talks began in March. One EU official said that reaching an agreement would still require major concessions from Britain, especially on the thorny issue of access to British fishing waters.
As it turns out, an eventual successful agreement between the UK and Europe would be a major boon for the pound, but since the expectation of a deal is largely reflected in prices, expect relatively small gains for the pound after a deal is reached. The January butterfly option is well below its year-to-date average, and the option reflects traders’ need to hedge against large swings in the exchange rate.
Lee Hardman, currency analyst at MUFG, also noted.
“The benefits of an Anglo-European trade deal are expected to be more limited, especially given the current sharp deterioration in UK fundamentals due to the epidemic shock. An effective vaccine will be more important in determining whether the pound continues to appreciate in 2021 than an effective vaccine.”
If the U.K. does end up with a “no deal” Brexit, it would shock financial markets and disrupt already fragile supply chains across Europe and beyond, and create new trade barriers and quota challenges for businesses, which would undoubtedly exacerbate the economic damage of the epidemic. The U.K. economy is already under too much pressure, and its growth rate is already much lower than that of other G7 countries.
In addition, a no-deal Brexit may also force the Bank of England to implement negative interest rates. Harvey stated.
“A no-deal Brexit would likely lead to a significant depreciation of the pound, while at the same time exposing the fragile U.K. economy to downside risks that cannot be dealt with by fiscal stimulus alone and would likely eventually force the Bank of England to implement negative interest rates.”
Time is now running out for the UK and EU parliaments to ratify the agreement before the end of the transition period on December 31, but investors have pushed the pound higher by about 2% so far this quarter on the back of optimistic expectations for UK-EU negotiations and a weaker dollar. In addition, as the UK-EU negotiations continue, the number of short CFTC sterling positions is increasing, with the CFTC Commodity Commercial Positions report for the week ending November 10 showing a decrease in net long sterling positions by 6,468 positions, with short positions increasing by 6,639 positions.
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