Sterling may see more drama

Sterling may see more drama

Sterling has remained very range-bound against the euro in the past couple of weeks, after making big gains in mid-October on news of an agreement on a revised Brexit deal.

The euro has been trading at just above the 86p level against sterling since then, with the calling of a general election in the UK having little impact on the currency.

The election is the next big risk event for sterling.

Another hung parliament, still deadlocked over Brexit, is likely to see sterling come under pressure again, with the euro rising back above the 90p level.

However, the opinion polls published in the past week show the Conservatives’ vote moving up towards 40%, which would put them on course for a majority.

A clear Conservative win would clear the way for the UK to ratify the Revised Withdrawal Agreement. This would see it leave the EU on January 31, but with a transition period to the end of 2020, during which time the current trading arrangements will stay in place.

Sterling could be expected to make further gains in such circumstances, but they may prove limited and short-lived.

There is strong technical support for the euro at around the 84p-85p level against sterling, which may be difficult to overcome. There is also considerable uncertainty about what the future trading relationship between the UK and EU will look like after the transition period expires at the end of next year. Thus, a Conservative win may only see the euro fall to around.

The UK’s departure from the EU at the end of January would not mean that Brexit is done. The trade talks that follow are likely to prove very difficult.

The EU has stated that guaranteeing and enforcing “common rules” will be a crucial part of any deal.

This may be a bridge too far for a Brexit-orientated Conservative government. Indeed, such a government could be prepared to fall back on WTO rules at the end of the transition period, rather than sign up for a trade deal that requires the UK to closely follow the rules of the single market. This would be very much a hard Brexit.

Next year, then, could see downward pressure and volatility re-emerge for the UK currency. We would not be surprised to see the 90p level against the euro revisited in this situation.

- Oliver Mangan is chief economist at AIB

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