The near-term outlook for the sterling continues to be dominated by late-stage Brexit negotiations, rather than fundamentals. Analysts at CIBC see the pound posting a mild recovery over the next months. They forecast GBP/USD at 1.29 by the end of the fourth quarter and at 1.31 by the first quarter of 2021.
Key quotes
“Brexit talks have now moved into an intensified state. The two sides are working on the legal text that will underpin an agreement, which will need to be ratified by the UK and EU parliaments. Due to timelines around the ratification process, this suggests that the deadline for an agreement is likely to be the second week in November. As both sides recognise that a no-deal scenario will compound increasing covid headwinds, we put the probability of an agreement at around 75%.”
“Should a deal be agreed to, removing the threat of tariffs and quotas, expect a potential GBP relief rally. Speculative investors have recently rebuilt negative sterling positions as Brexit uncertainties have persisted. Expect a free trade arrangement, albeit limited in scope, excluding the key services sector, to encourage an unwind in sterling speculative shorts, boosting short-term GBP valuations.”
“Avoiding a no-deal EU exit will encourage short-term sterling gains as speculative shorts are cleared. However, with the realisation of ongoing trade frictions being compounded by weakening economic performance, alongside the rising tide of Covid cases, the UK economy remains highly exposed to a retreat in service sector activity. Consequently, we expect more BoE QE in November, providing reason as to why any post-Brexit GBP gains will prove short-lived.”
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