Sterling steadied as UK prime minister Theresa May tried to persuade the EU to modify her own Brexit deal to avoid a disorderly British departure from the bloc.
European Council president Donald Tusk said yesterday he would make no new offer on Brexit and those who promoted Britain’s exit without any understanding of how to deliver it deserve a “special place in hell”. The sharpening of rhetoric did not budge the pound much, with investors focused instead on plans to get a deal across the line.
A Reuters poll predicted sterling will gain between 2% and 5% if Britain parts ways with the EU with a divorce deal but will slide between 5% and 10% in the event of a disorderly Brexit.
Asked what would happen to sterling if Britain leaves with a deal, strategists who answered an extra question in a regular monthly poll were almost unanimous in expecting it to make gains. All of them said the currency would fall if Britain crashes out without a deal. But the prospective gains were weaker than potential losses.
“The rationale would be that markets are going to wait right up until the last possible moment to sell off in terms of how a no-deal might materialise. Markets will hold out for a last-minute breakthrough,” said George Brown at Investec.
“If that wasn’t to materialise then you will see a big, sharp depreciation,” he added, saying a deal would take form over time and so should be gradually priced into the currency, hence the more modest gains.
Medians in the wider poll, taken between January 31 and February 5, see the pound making solid gains on the dollar in the coming year, which suggests foreign exchange strategists expect an agreement to be reached.
In one month’s time a pound will be worth $1.31, in six months $1.35 and in a year it will be almost 8% stronger at $1.40, according to the poll.
Reuters polls of economists have consistently indicated that they expect Britain and the EU to eventually agree a free trade deal.
A hike to the European Central Bank’s deposit rate will not come until the fourth quarter, another Reuters poll found, later than previously thought as the risk of a recession in the currency union has risen. But markets don’t expect an ECB rate rise until mid-2020.
So against the euro, the pound will make modest gains. It was trading at 88.1 pence and in six and 12 months forecasts are for the pound to be worth 86 pence.
Meanwhile, Britain’s biggest housebuilder Barratt said it was liaising with its suppliers to ensure the smooth arrival of overseas components by boosting inventories and looking at alternative routes as it prepares for Brexit.