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Pound traders brace for tense week as Brexit talks continue

Sterling traders are gearing themselves up for another nervy week amid fears that a collapse in Brexit talks could spark a sharp sell-off in the pound.

Negotiations are ongoing, but noises from both camps suggest they remain stuck on fishing rights and competition policy.

British health secretary Matt Hancock this morning told Sky News that the European Union was making “unreasonable” demands.

France appears to be taking a tough stand on fishing rights, arguing that it will not take a sub-standard deal.

The pound is currently trading at around two year highs of around $1.35. Yet it slipped back from even higher towards the end of last week as doubts about a Brexit deal emerged.

No-deal Brexit: Pound could hit $1.15 or lower

Economists at consultancy Capital Economics said last week that the pound could tumble to $1.15 in the event of a no-deal Brexit.

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Such an outcome would lead to disruption for businesses as well as higher tariffs for certain sectors. The UK’s budget watchdog has said it could knock two per cent off the economy next year.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said no deal could see sterling fall to $1.23. He said it could fall to about €1.04 against the euro, from its current price of €1.103.

Nomura currency analyst Jordan Rochester said the pound could even plunge to $1.01 in a worst-case scenario where “capital markets struggle to function” amid financial disruption.

However, Tombs said the pound was “less vulnerable” than in 2016, when it dropped sharply after the Brexit referendum.

He said it is now less dependent on external finance thanks to a lower current account deficit. And he said the Bank of England also has less scope to cut interest rates, which would hurt the pound.

Analysts and investors are torn on whether the UK and EU will reach a deal. Analysts at UBS said that if a deal is struck and vaccines aid the economy then sterling could hit $1.37 by the end of 2021.

By Harry Robertson

Source: City AM

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Risks to UK economy as Brexit deadline approaches

With the UK economy suffering more from the coronavirus than most advanced nations, the stakes couldn’t be higher as Brexit trade negotiations enter their endgame.

Gross domestic product (GDP) will likely be smaller than what it would have been had the UK stayed in the European Union (EU) regardless of the outcome.

But reaching an accord would help avoid major trade disruptions come Jan 1.

Leaving without a deal, meanwhile, means that Brexit could end up inflicting more lasting damage than the pandemic, according to economists. Both sides say the onus is on the other to make a decisive move before the transition ends in just over a month.

The pandemic has put Britain on course for its deepest economic slump since the Great Frost of 1709.

By the first quarter of 2025, GDP will be 3.1% lower than anticipated in March, according to estimates by the Office for Budget Responsibility (OBR) released on Wednesday. The fiscal watchdog deems the loss of output to be permanent.

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In a separate analysis, the OBR said transitioning into a free-trade agreement with the EU would shave 4% off GDP in the long run.

A no-deal scenario – meaning a shift to World Trade Organisation rules – would mean losing another 1.5%. Dan Hanson of Bloomberg Economics puts the combined cost higher still, at 7% of GDP.

Jobs are also on the line. Unemployment is set to peak at 7.5%, or 2.6 million people, next year under the OBR’s central scenario that a trade deal be reached. A no-deal exit pushes the rate up to 8.3%.

Financial services and export-reliant manufacturing sectors such as the car industry, food and textile producers stand to be among the hardest hit if trade talks fail.

There are concerns that the time and money spent dealing with the pandemic has left many firms ill equipped to cope with the potential costs and disruptions ahead.

A Bank of England survey of chief financial officers last month found less than 4% of them were fully prepared for the end of the transition period.

Before the pandemic, businesses were already holding back on spending as they awaited greater clarity over Britain’s post-divorce relationship with Europe.

No matter what the outcome of the talks, a period of adjustment is likely to make it hard for companies to know how best to invest for the future, but a move to WTO terms risks keeping spending depressed for longer, hitting already weakened productivity. — Bloomberg

Source: The Star

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Pound lingers above 10-day lows as Brexit talks enter crunch week

The British pound held above a 10-day low on Monday as investors cut their holdings with British and European negotiators scrambling to salvage post-Brexit trade talks.

British Prime Minister Boris Johnson said on Friday there was no point in continuing talks and it was time to prepare for a ‘no-deal’ exit when transitional arrangements end on Dec. 31 while the European Union said Britain needed to give ground.

EU chief negotiator Michel Barnier had been due in London for talks with his British counterpart David Frost this week. Instead, they will now speak by telephone on Monday to discuss the structure of future talks.

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With only 11 weeks to go before the end of the transition period, Berenberg economists estimate the probability of a hard Brexit at as much as 50% with both sides taking steps to soften the blow on their respective economies.

“We thus have to watch carefully the risk that neither side blinks and, in the end, the two sides finally part ways without a deal,” they said in a note.

Against a broadly steady U.S. dollar, the pound edged 0.2% higher at $1.2936 hovering just above a Oct. 7 low of $1.2860 hit on Friday. Against the euro, the pound weakened 0.3% to 90.49 pence.

Latest positioning data for the week ending Oct. 13 showed investors have been steadily reducing their holdings in the British pound.

While the overall picture showed a small reduction in net short pound positions, the overall picture was worrying with hedge funds cutting both their bought and sold bets.

In derivative markets, one-month implied volatility gauges for the pound firmed above 11%, the highest levels in more than a month, pointing to rising uncertainty.

Source: UK Reuters

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Sterling dips below $1.30, tough Brexit negotiations eyed

Sterling sank on Tuesday, dipping against a broadly stronger dollar as investors kept an eye on ongoing Brexit negotiations for fresh drivers for a currency that has hovered below the $1.30 mark since September.

Recent reports have shown that the European Union wants more concessions from Britain before entering a last, intense phase of negotiations on future relations following the United Kingdom’s departure from the EU.

The two chief negotiators, the EU’s Michel Barnier and Britain’s David Frost, say they are inching towards a deal, though they have underscored that important gaps remain on fishing, level playing field issues and governance.

British Prime Minister Boris Johnson had set a deadline of the Oct. 15 EU summit for agreeing a trade deal and Frost is in Brussels for intensified talks.

With no fresh news coming out of the negotiations, sterling was trading in tight ranges. By 1521 GMT, the pound was 0.6% lower to the dollar at $1.2983.

The pound has been only minimally affected this week by labour market data, the Bank of England further weighing the possibility of negative interest rates, and renewed social restrictions in the UK to combat a fresh wave of COVID-19 infections, despite the implications of these factors for Britain’s economy.

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On Tuesday, Housing Secretary Robert Jenrick said the British government may have to impose tougher restrictions than it currently has if the second spike of the novel coronavirus accelerates in high risk areas.

Johnson introduced a new tiered system of restrictions for England on Monday, with Liverpool and the surrounding Merseyside area placed in the highest level, with pubs shut, to curb an acceleration in COVID-19 cases.

“The UK government announced stricter containment measures in some areas of the country and top health officials are already suggesting more will likely be needed,” ING strategists said in a note to clients.

“This is not good news for the battered UK economy but with Brexit negotiations at a critical phase, hardly anything else looks likely to impact the pound (the lack of reaction to labour data and comments about negative interest rates being a case in point).”

The Bank of England asked banks on Monday how ready they are for zero or negative interest rates. BoE policymaker Jonathan Haskel said the central bank had an “absolutely open mind” about the possibility of sub-zero rates as part of its support for Britain’s economy during the coronavirus crisis.

Britain’s unemployment rate rose by more than expected to 4.5% in the three months to August, its highest in more than three years, even before the end of the government’s broad coronavirus job protection plan.

Economists polled by Reuters had expected the jobless rate to rise more slowly, to 4.3% from 4.1% in the three months to July.

Sterling traded in tight ranges against the euro on Tuesday, last flat at 90.40 pence per euro.

“As we still see no major breakthrough in the Brexit negotiations this week, we think euro-sterling will continue to be trapped in the 0.90-0.92 range,” said Kristoffer Kjær Lomholt, Chief Analyst at Danske Bank.

Reporting by Ritvik Carvalho

Source: UK Reuters

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