British Pound "will Continue to Trade with a Negative Bias" Until Details of Transitional Brexit Deal Transpire
- Written by: Gary Howes
-
- FX Quotes:
- Pound to Euro Rate: 1 GBP = 1.1180 EUR
- Pound to Dollar Rate: 1 GBP = 1.3028 USD
Pound Sterling is seen stabilising against the likes of the Dollar and Euro at the start of the week commencing July 24.
Ahead of the weekend, we reflected on the positive developments of the apparent break-out of peace in the bickering UK cabinet with regards to a transitional deal being put in place to cover the UK's exit from the EU.
The top-dogs in UK Government have for a long period been at loggerheads over many issues concerning UK’s exit from Europe, even on the question of a transition deal.
A transition deal would be the implementation period put in place from the time the UK exits the EU in March 2019 and would keep existing trade and migration settings in place, for a period of 2-4 years.
The issue is key, as many analysts notice that a disorderly Brexit is detrimental to the British Pound’s outlook as it will hinder business activity and confidence.
Environment Secretary Michael Gove told an audience on Friday, July 24 that the cabinet is now unified in the recognition that a transitional period is needed. The apparent unity, we believe, is positive for Sterling.
But, It's Too Early to Bet on a Full-Blown Sterling Recovery
According to analyst Viraj Patel with ING Bank N.V, it is "still a bit too early to be pricing in any Brexit transitional deal hopes."
"The growing consensus within PM May's cabinet for a post-Article 50 transitional arrangement is indeed good news for GBP in the broad scheme of things," says Patel.
The analyst reflects that, "a two or three year 'implementation phase' starting in April 19 would avoid the risk of a cliff-edge Brexit – that is trade between the UK and EU defaulting to WTO rules, which is arguably one of the biggest uncertainties clouding GBP markets.”
Above: International Trade Secretary Liam Fox, an arch-Brexiteer, comes on board with the idea of having a transition deal.
But, the question for ING’s analysts is whether it is too soon for markets to begin pricing in such a scenario.
“In our view, yes; while the wind may be blowing in the direction of a transition deal, recent Brexit negotiations highlighted the number of “divorce” stumbling blocks that need to be overcome before any transitional arrangement is signed, sealed and delivered,” says Patel.
In short, there is still much work to do and the EU will really push for a win on the initial issues concerning the Irish border, the rights of UK & EU nationals on either side of the channel and a commitment by the UK to pay its divorce bill.
“Until then, we think GBP will continue to trade with a negative bias,” says Patel.
The need for a transitional period has become increasingly relevant in light of the recent softness seen in UK data.
The International Monetary Fund downgraded their 2017 growth forecast for the UK economy in their mid-year financial assessment from 2.0% to 1.7%.
The downgrade comes after a particularly soft first-quarter for the econoy.
The downgrade prompted the UK treasury to renew its call for a smooth exit from the European Union; in an echo of Chancellor Philip Hammond's preferred stance.
With growth slowing, the UK Government's hardest Brexiters will feel they can afford to show some patience on the matter in order to help the econoym, or risk losing office completely.
It's not all negative for the UK currency though.
Analyst Fawad Razaqzada at Forex.com is however slightly more bullish on Sterling's prospects this week and sees some lift, particularly against a struggling Dollar.
"The GBP/USD may now play “catch up” and follow the footsteps of the EUR/USD from last week," says the analyst.
GBP/USD has now spent a considerable amount of time trading on both sides of the 1.30 handle.
"There was very little follow-through to the downside when it broke lower last week. This suggests to me that the market probably wants to push higher as the sellers apparently do not want to commit at these levels," says Razaqzada.
