British Pound Tipped for Fresh Losses Against Dollar and Euro Next Year

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- Pantheon Macroeconomics tips GBP to fall Vs USD and EUR in 2020.

- As Brexit negotiations go down to the wire and ‘no deal’ fears rise.

- GBP/USD seen back at Oct levels as GBP/EUR suffers lesser decline.

- But others see even steeper GBP losses lurking in long grass of 2020.

- Brexit extension request and a surprise deal both upside risks to GBP.

The Pound is tipped by one of the UK’s leading economists to fall against the Dollar and Euro in 2020 as fears of a ‘no deal’ Brexit rise again, although a weaker Sterling next year is increasingly becoming a consensus view. 

Pantheon Macroeconomics has told clients the Pound will likely fall in the second half of 2020 even though the firm anticipates that a ‘no deal’ Brexit will be avoided. It says fears over the prospect of a trade relationship governed by World Trade Organization (WTO) rules will likely reach a fever pitch in the second half and that this will weigh on the UK currency.

“We expect sterling to depreciate to $1.25 in the second half of 2020, when concerns that no trade deal will be agreed likely will peak. We would revise down our forecasts for GDP growth and anticipate Bank Rate cuts if the U.K. exits the transition period in December 2020 without a trade deal,” writes Samuel Tombs, chief UK economist at Pantheon in a year-ahead briefing.

Above: Pound-to-Dollar rate shown at daily intervals. 

Prime Minister Boris Johnson has until July to agree an extension of the ‘transition’ period provided for by his withdrawal agreement, according to the pact itself, which is something he’s already ruled out in rhetoric and is attempting in parliament to void as a legal possibility. Johsnon’s revised version of the EU Withdrawal Agreement Bill, which was backed by the House of Commons last Friday, forbids an extension of the standstill transition period that’s due to end alongside the 2020 year. The bill is on course to become law by January 09.

However, already European Commission chief Ursual Von der Leyen appears to have set her sights on an extension as the first and foremost objective in the negotiations. She told the French and German press last week that an extension would be necessary and that it’ll need to be agreed around mid-year, echoing the comments of European leaders and other EU officials.

Many doubt the future relationship can be agreed in one year despite the fact that both parties will enter the talks with matching external tariff and regulatory regimes around trade. Concerns over the tight timetable have been made worse by Von der Leyen and other officials who've said in recent weeks that an eventual agreement must include 'level playing field' commitments, which is a reference the Brussels's desire to prevent the UK from using tax, climate and state aid policies to gain an edge over its EU rivals after Brexit.

Above: Pound-to-Euro rate shown at daily intervals. 

“We do not know the strength of Euroscepticism among the new intake of Conservative MPs. And the PM is doubling-down on the commitment in the Tory manifesto to not extend the transition period beyond December 2020, by setting it into the Withdrawal Agreement Bill that MPs will sign-off in January. The stage is set, therefore, for Brexit risk to dampen the economy again in the second half of next year,” Tombs says.

Sterling has risen 9% against the Euro and 10.7% against the Dollar since early-to-mid October when Johnson first announced he’d agreed terms of the UK’s exit with the EU. And gains are even larger if measured from the lows struck in August when market fears of a ‘no deal’ Brexit under the newly-minted PM Johnson were at their fever pitch. 

Tombs forecasts the Pound will weaken sharply against the Dollar and modestly relative to the Euro in the second half of next year as markets again fret over the prospect an exit on WTO terms. He projects the Pound-to-Dollar rate will end 2020 at 1.25, it’s pre-withdrawal agreement level from October, while the Pound-to-Euro rate is tipped to fall from 1.1734 Monday to 1.15.

Above: Pound-to-Dollar rate shown at weekly intervals. 

Not even a rise in market expectations for interest rates, which might happen if the economy picks up in the New Year, will be enough to offset the pressure on the Pound stemming from lingering Brexit uncertainty, Tombs has told clients, although the decline against the Euro is less than for the Dollar because the single currency is also expected to suffer its own setbacks in 2020. 

“We expect quarter-on-quarter GDP growth to slow to a 0.3% rate in the second half of 2020 and then to just 0.2% in 2021, when the new skeleton trade deal with the E.U. likely will be in place," Tombs says. "We would revise down our forecasts for GDP growth and anticipate Bank Rate cuts if the U.K. exits the transition period in December 2020 without a trade deal...But the risks to our forecast are not solely to the downside; faced with no-deal, the PM might change tack and decide to extend the transition period into 2021."

Pantheon's Tombs forecasts a near 5% decline for the Pound-Dollar rate to 1.25 next year, although he's not alone because a number of major banks are also looking for Sterling to fall back below its October levels including Barclays, J.P. Morgan and Westpac. All of those latter firms project the Pound will fall to 1.25 or below in 2020, with Barclays tipping a decline all the way down to 1.11. 

Meanwhile, the Pound-to-Euro rate is seen falling back to 1.15 by year-end, which is itself an above-consensus forecast. Other firms including Deutsche Bank, J.P. Morgan and Natixis all see the exchange rate trading below the 1.10 level by the end of 2020. 

Above: Pound-to-Euro rate shown at weekly intervals. 

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