Macroeconomy

UK update - the divorce saga continues

The wide gap in views between the two camps make it is very unlikely we will have a breakthrough this week.

Thomas Costerg, US Economist & Luc Luyet, FX Strategist

UK update - the divorce saga continues

This week’s (round eight) EU-UK negotiations began with each side launching accusations at the other.

Bottom line, we are still in the phase of a dialogue of the deaf and it is unlikely this week of talks will provide any meaningful breakthrough. We think clarity will only emerge by mid-October, closer to the deadline. In other words, we would interpret current signals as mostly posturing. .

We still expect the deadline to fudged again, with the status quo extending beyond 31 December. In other words, we still think the UK (and the EU) want a deal. But the risk that the UK exits the EU without a deal is on the rise given the entrenched positions on both sides.

The UK economy could also be hit by the possibility of higher corporate taxation and reduced fiscal support to furloughed workers. The potential hit to business sentiment at a time when negotiations with the EU are hitting a rock could be sizeable. At this stage we are leaving our 2020 growth forecast for the UK at -10.5% (our provisional 2021 forecast is +6.0%, indicating no ‘V’ shape recovery and an ongoing hit from Brexit uncertainty). 

The Bank of England looks set to come to the rescue once again by expanding quantitative easing (QE) potentially as soon as its next meeting on 17 September. We still believe negative rates in the UK are likely only in the worst case scenario of a tumultuous no-deal exit from the EU, but we will watch how the ongoing debate at the Bank of England evolves. Whether the European Central Bank decides to cut further nto negative territory could also be a potential factor in Bank of England thinking.

From a currency point of view, we fail to see drivers that could support a significant appreciation of sterling. Bold fiscal stimulus and supportive global risk appetite have been supportive of the currency during summer, but dark clouds in the form of macro data are already making their return.. Our three-month forecast stands at USD1.27 per GBP and our 12-month projection is USD1.32 per GBP, as we see little reason why sterling should outperform other major currencies.

Read full report here

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