British Pound: "Relax" say Barclays, Path Forward is a "Long Drama, not an Intense Thriller"
Image © Pound Sterling Live
- A lot of negativity already in the value of Sterling
- Barclays say odds heavily in favour of EU-UK striking Brexit deal
- Long-term damage to economy by Brexit is main route to GBP weakness
The Pound has shot up, and then back down again in less than one week with markets apparently hanging on every word of the EU's Chief Brexit negotiator Michel Barnier.
Markets are wrong to do so suggest strategists at UK high-street lender Barclays who have confirmed to corporate and investment banking clients they believe Pound Sterling has absorbed a good portion of Brexit-related uncertainty.
Instead what really matters for the Pound is the longer-term evolution of the economy under its new Brexit-inspired equilibrium.
And, there is room for the Pound-to-Euro exchange rate to appreciate further in the near-term as a result.
The call comes as fresh Brexit-related headlines confirm progress towards an EU-UK deal by November will be fraught with difficulty and a rising chance of a 'no deal' outcome, yet for strategists with Barclays it would be wrong to expect the two sides to fail to reach agreement.
In a weekend interview EU Brexit negotiator Michel Barnier said he is “strongly opposed” to the prime minister’s Chequers proposals on future trade.
Barnier believes the British offer on customs was illegal and its suggestion of a “common rulebook” on goods would kill the European project.
These latest comments are notable as they come a mere few days after the negotiator injected some much-needed optimism into the Brexit negotiation process by saying "the EU is preparing to offer a partnership with Britain such has never been with any third country."
Barnier's observation helped stoke a broad-based recovery in the value of Pound Sterling relative to its major competitors.
Yet, Barclays believe more gains are possible.
"Following the recent focus on 'no deal' scenarios, EU Chief Negotiator Barnier’s comment last week that the EU was prepared to offer the UK an 'unprecedented partnership' has opened some near-term optimism and EUR/GBP downside, in our view," says Nikolaos Sgouropoulos, a strategist with Barclays in London.
The Pound-to-Euro exchange rate is quoted at 1.1138 at the time of writing, having been as low as 1.0991 in the previous month.
"While we do not view this as a new development, given it is in line with our central case of an orderly but hard Brexit, we do feel a lot of negativity was discounted in GBP asset prices," adds Sgouropoulos.
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Further Volatility
While the scope for notable near-term downside is held as being limited by strategists at Barclays, we are told that the prospect of further volatility remains likely.
Last Friday Brexit Secretary Rabb met with EU’s Barnier, but the meeting did not result in any conclusive statements, with Barnier stressing the need for a detailed backstop solution for Ireland, "leaving room for further volatility," says Sgouropoulos.
Expect Brexit-related headlines to prove lively as Tuesday sees the UK parliament returns from summer recess and resume Brexit withdrawal bill discussions.
Further potential sources of volatility on the horizon include:
- The September 20 informal EU summit,
- the September 30 - October 03 Conservative party conference,
- the 18 October EU summit at which the UK and EU are scheduled to finalise the agreement,
- and a potential extraordinary summit in November in the event that the withdrawal agreement is not finalised by the October summit.
"Further political noise around negotiations and UK politics likely will keep GBP more volatile than other G10 currencies in coming months, but we see its direction as dominated by the UK economy," says Marvin Barth, a foreign exchange researcher with Barclays.
However, the base-case scenario adopted by Barclays pertaining to the outcome of Brexit negotiations is that the two sides reach a deal and the UK ultimately leaves the EU single-market and customs union in the "distant" future in a relationship defined by "ambiguous contours".
Expect the EU and UK to extend various deadlines, this should ensure lingering uncertainty and further prevent the kind of business investment required to push the economy back to pre-Brexit rates of growth.
Counting Long-Term Economic Costs
Barclays meanwhile observe "Sterling has borne the brunt of recent ‘No-Deal’ rhetoric, but wrongly."
Instead, for analysts, the main threat posed to the British Pound stem from the longer-term slowdown to UK economic activity posed by Brexit.
In line with a lengthy negotiation and implementation process, Barclays expect economic losses to be spread over an extended period of time and data to display little quarter on quarter volatility.
Long-term "wealth losses due to Brexit" are seen potentially amounting to about 5% of GDP over the long run or about 0.3% of annual growth per year.
"We see little scope for economic upside along the path to Brexit," says Barclays economist Fabrice Montagne.
Barclays envisage a continued slowing of UK economic activity, moderation of inflation, and a likely reduction in expectations for BoE policy.
"GBP may suffer headline volatility, but its path in the year ahead will likely be dictated by the economy, not Brexit. So, relax and get ready for a long drama, not an intense thriller," adds Barth.
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