Bad News Just Won’t Stop Coming for the Pound
(Bloomberg) -- Already bruised from its biggest year-to-date drop since the early 1990s, the pound is now facing a familiar menace -- Brexit.
Britain and the European Union resumed talks over their future trading relationship -- a process already troubled by the U.K.’s refusal to budge on an end-2020 deadline despite the coronavirus crisis. The concern is that the final divorce terms will be messy.
And if it comes to pass, it will add pressure to an economy that’s already exposed to severe damage from the pandemic.
Analysts at Rabobank, Mizuho Bank Ltd. and Royal Bank of Canada see the U.K. currency extending losses in the coming months amid heightened Brexit uncertainty.
“Up until now, the foreign-exchange world has largely been dollar-driven” amid the virus outbreak, said Ned Rumpeltin, European head of currency strategy at Toronto-Dominion Bank. “The return of Brexit risks could become a differentiator for sterling -- beyond the direct impact of the virus.”
The U.K. currency has already dropped 7.3% against the dollar in 2020 to $1.2294 as of 1:14 p.m. in London, its biggest year-to-date retreat since 1991.
Sterling fell as much as 1.2% to a two-week low on Tuesday, weighed down by wider unease on global markets after a rout in the U.S. oil market. Prices collapsed below zero on Monday, thrusting markets into a parallel universe where traders were willing to pay $40 a barrel just to get somebody to take crude off their hands.
From Bad to Worse
“The number of buy-side inquiries today from overseas suggests Brexit is returning to the fray,” said to Neil Jones, head of foreign-exchange sales to financial institutions at Mizuho Bank. “Fresh investor concern is creeping in.”
He sees the pound weakening below $1.20 before the end of June, the deadline for the U.K. to ask for an extension on trade talks. And while Rabobank’s head of currency strategy Jane Foley expects sterling to fall over 4% in the next three months to $1.19, she sees it rebounding toward $1.26 by year-end if a deal is reached.
Meanwhile, the Royal Bank of Canada’s Adam Cole sees it falling about 3% to 90 pence per euro by mid-year and to 92 pence by year-end. Option prices show traders are seeking refuge against a drop in the pound against the dollar over the week ahead.
Brexit sent the pound on a roller-coaster ride last year too -- it fell on fears of a no-deal outcome, before rallying in late 2019 as Prime Minister Boris Johnson’s decisive election victory ended a domestic political deadlock.
Yet those moves have paled in comparison with this year’s swings. Sterling plunged to its lowest level against the dollar in over three decades in March as the shocks caused by the coronavirus rippled through global markets.
Betting on a Deal
Not everyone is that pessimistic on the pound.
Standard Bank sees sterling strengthening to 80 pence per euro -- a level not reached since the 2016 vote to leave the EU -- or beyond as the growth shock from the virus forces the EU to reach a deal with Britain to avoid further chaos.
Yet if the two sides still fail to reach a deal, the U.K. would default to trading on terms set by the World Trade Organization -- meaning a return of tariffs and quotas where there are none today.
“The government is determined not to extend the transition period,” said Kenneth Broux, a strategist at Societe Generale SA in London. “I can’t see how that can be positive for the pound (and euro) against the dollar.”
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