Sterling has depreciated by around 5% versus the USD in September as the Brexit clock is ticking. Jeremy Stretch from CIBC Capital Markets expects a modest deal to be reached, supporting GBP resilience.
Key quotes
“While we still expect a deal even this late, it will likely be far from comprehensive. While the UK has placed a self-imposed October 15th deadline on discussions, in line with the EU leaders summit, we would not be surprised if talks extend at least until the end of October. As the timeline tightens, we expect sterling to continue to be whipsawed by Brexit headlines. We underline that the reaction to a deal or no-deal scenario is likely to be far from symmetrical.”
“If our base case of a modest trade deal being agreed to is correct, expect modest GBP impetus into year-end, towards the 1.29 mark. Failure to reach a deal could see sterling heading back towards the end of March lows.”
“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. While the BoE has acknowledged negative rates as part of its toolbox, they continue to view them as only being used in an emergency setting, namely a no-deal Brexit scenario.”
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