The return of no-deal headlines has put GBP under renewed pressure. The base case for an eventual deal supports a moderate recovery for sterling over the medium term, but economists at TD Securities expect cable to remain driven more by the USD leg overall. A no-deal surprise would naturally see a knee-jerk GBP sell-off but this may remain somewhat contained, however, as a lot of bad news is now in the price and the UK has larger problems on its hands.
Key quotes
“We are wondering whether a good portion of the challenges Brexit poses for sterling may now be priced. Now, to be clear, we think the shock value of failing to reach a deal by the end of the year will see GBP weaken — and probably sharply at that. We are no longer as confident, however, in stating it will stay that way.”
“Ultimately, the UK has bigger problems on its hands. The UK is among the hardest-hit of the major economies by the pandemic. The current second wave presents additional challenges that still need to play out. This is likely to be a much bigger factor for sterling next year than Brexit.”
“We continue to target a move up in GBP/USD to 1.35 for year-end and forecast of 1.38 for 2021-Q4. Within this, we note that we expect USD depreciation to be the primary factor. Indeed, our forecasts imply a path for EUR/GBP that stays mostly in the 0.90/91 range over our horizon.”
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