Limited upside for British currency amid EU trade deal uncertainties

The likelihood of the UK failing to reach a partial trade deal with the European bloc is lower than it was, Lombard Odier says

The sun sets behind tower cranes and the London skyline, including the Shard building at left, and other skyscrapers in the city financial district of London, Tuesday Jan. 21, 2020. (Dominic Lipinski/PA via AP)

The likelihood of the UK failing to reach some sort of a trade deal with the European Union is low but the complexity and tough nature of negotiations ahead will thwart any rally in British pound this year, the chief investment officer of Swiss private bank Lombard Odier said.

The risk of the UK not signing at least a partial deal with the EU before its 2020 deadline is lower than “before December’s general election”, Stéphane Monier said in a note to investors on Wednesday.

“We believe that the possibility of another cliff-edge, year-end, no-deal scenario will keep enough pressure on sterling to cap any rallies in the UK’s currency,” he said. “In the near term, we expect GBP-USD to trade in a narrow range between $1.28 and $1.32 (Dh4.70-Dh4.85).”

The British pound was up 0.1 per cent at $1.3015 at 1.38pm UAE time after the UK released inflation numbers that signalled its economy is fighting Brexit woes. The European currency is facing its own slide against the greenback as the eurozone economy softens. The euro, which is making a beeline to its lowest level since 2017, rose marginally to $1.0805.

Markets had been waiting for the hard European economic data to catch up with lower sentiment in surveys after a trade war-induced contraction, Jasper Lawler, head of research at London Capital Group, said on Wednesday.

“Now surveys have tanked again it could spell a recession,” Mr Lawler said. “With the benefit of hindsight, the best argument against euro-dollar parity on prior occasions was the resilience of Germany’s economy. This time Germany is in a rut and that makes the case for parity more compelling.”

The UK economy, after voting to leave the EU more than three years ago, is still struggling with Brexit-related uncertainties. With the biggest Conservative majority in parliament since 1987, Prime Minister Boris Johnson’s government is looking to use fiscal stimulus to kick-start the stagnating economy.

Expediting a high-speed infrastructure project linking London to the north of England, at an estimated cost of more than £100 billion (Dh478bn), is among the planned measures. The Bank of England’s outlook, released in January, forecasts growth in gross domestic product of 0.2 per cent for the first three months of 2020, on a quarterly basis, compared with zero growth in the final quarter of last year.

“Our annualised forecast, broadly in line with the BoE’s expectations for the 2020 full year, is for GDP growth of 1.4 per cent and inflation of 1.8 per cent,” the Lombard Odier report said.

The BoE's deputy governor, Andrew Bailey, will take over from Mark Carney on March 17 and chair his first monetary policy committee on March 26. Ahead of that meeting, markets are pricing a one-in-four chance of a cut in interest rates, Lombard Odier said, citing Bloomberg data. The BoE based its January decision to leave rates on hold on a stabilising economic environment both at home and abroad. However, any renewed outbreak of Brexit-related uncertainty would be likely to push the BoE towards easing, the bank noted.

The EU and the UK are preparing to start negotiations on future trade relations in March. Mr Johnson has said that the UK is not planning to follow EU rules on subsidies, competition, social standards or the environment, and has already ruled out requesting an extension to the December 31 deadline. The UK’s rush to sign a deal with the EU suggests that it wants to rapidly turn to securing agreements with other trade partners, which will bring their own challenges.

“Given the short, 10-month negotiating timetable, only a limited agreement may be possible,” Monier said. “The EU’s trade agreement with Canada, sometimes cited by Mr Johnson as a model, took more than five years to negotiate and will only be fully implemented over several more.”