UK pound may rise 4% in a year on hopes of a EU-UK trade deal

The dollar’s dominance will slowly decline over the next 12 months on a subdued US economic outlook, new poll finds

Sterling is expected to gain towards the end of the year if Britain and the European Union manage to negotiate a deal over future trade relations. Bloomberg
Sterling is expected to gain towards the end of the year if Britain and the European Union manage to negotiate a deal over future trade relations. Bloomberg

Sterling will gain towards the end of the year if Britain and the European Union (EU) thrash out a deal over future trade relations as most analysts expect, a Reuters poll found.

But London and Brussels remain far apart in negotiations, and the risk of a no-deal Brexit at the end of 2020 remains firmly on the table, analysts also say.

The pound, down around 6.5 per cent against the dollar this year, made some gains on Tuesday – largely due to end-of-quarter rebalancing rather than improvement in sentiment or reaction to Prime Minister Boris Johnson’s plan to fast-track £5 billion (Dh22.9bn) of infrastructure investment.

The currency pairing was hovering around $1.24 on Wednesday and the June 25-July 1 poll of almost 60 foreign exchange analysts said it would be at the same level in one and three months’ time.

It will then shift up a gear to $1.27 by the end of December when Britain’s transition period after leaving the EU is due to expire. The pound will be around 4 per cent stronger than current levels at $1.29 in a year, the poll found.

“Our central scenario is that some kind of Brexit deal or delay will be agreed. With this in mind, we think sterling will rise, however, given recent developments, the risks to our forecasts are to the downside,” Simona Gambarini at Capital Economics said.

While successive Reuters polls since the June 2016 referendum decision to leave have said the two sides would agree a deal, forecasts for the 12-month horizon were wide, ranging between $1.18 and $1.49, highlighting the uncertainty.

Over 10.5 million people have been infected by the coronavirus globally and there are fears that as countries ease restrictions, there will be a resurgence of cases, as has been seen in some US states.

We think sterling will rise, however, given recent developments, the risks to our forecasts are to the downside

Simona Gambarini, Capital Economics

The dollar’s dominance will slowly melt away over the coming year on weakening global demand and a sombre US economic outlook but a second shock from the coronavirus would push it higher.

Against the euro, the pound will not see much action for a year. One euro will be worth the £0.90 it was on Wednesday in six months. In a year, it will fetch £0.88, the poll found.

Updated: July 2, 2020 04:10 PM

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