Let’s forget about no-deal or deal Brexit for a few minutes. With or without a Brexit deal, how will the pound and the euro behave?
The pound is now up to 1.30 against the dollar, and at 1.11 against the euro – little changed from the range-bound trading it’s seen ever since we got into the intense phase of Brexit negotiations.
Meanwhile the euro has seen a slow-but-steady rise in value largely based on the massive effort of the EU Commission to support recovery across the 27 Member States.
If there is a last-minute Brexit agreement, the pound will jump for a week or so, then probably fall back, given the grim expectations for the British economy regardless of Brexit terms.
Forecasts compiled by the UK government and published on Wednesday show the average prediction for UK GDP this year is now -10.1 per cent. Unemployment is expected to hit 8.3 per cent by the end of the year. The economy is expected to rebound by only about 6 per cent in 2021, with unemployment remaining at 6.6 per cent by the end of next year.
With this picture in mind, it’s not surprising that the pound has fallen towards parity with the euro ever since the vote in the UK to leave the European Union, and the further impact of the Covid-19 pandemic on the country’s economy.
The Bank of England has also been mulling the prospect of negative interest rates. This would put substantial downward pressure on the pound.
But analysts at Canadian Bank CIBC expect sterling to remain under pressure regardless of whether rates turn negative: “The key variables feeding into forecast revisions are the evolution of Covid cases and the transition to new trading arrangements post-Brexit. The Bank’s long-run Brexit assumption was for the UK to witness an “orderly move to a comprehensive free trade arrangement”. However, that looks increasingly implausible with or without a Brexit deal.”
The analysts explained: “While we still expect a deal even this late, it will likely be far from comprehensive. Beyond Brexit, the BoE’s assumed ‘V’ shaped recovery looks set to be challenged by tightening lockdown restrictions. Although the UK government remains intent upon avoiding a repeat of the March lockdown, the drag on service sector activity will still weigh on the recovery.”
All of this suggests that the pound and the euro are headed for parity – and that would be a major game-changer for investors.