Analysts at MUFG Bank argue that this year will be another year of uncertainty related to the United Kingdom’s departure from the European Union that will continue to hinder economic growth and hence the pound.
“If the negotiation period is a mere 11mths, there is little prospect of much beyond a ‘barebones’ FTA. Indeed, the period available will be less. Setting out the terms of negotiations likely means a start date sometime in March. Then ratification in London and across the EU would take additional time before the end of the year (…) With much unresolved, a close alignment from day one is very unlikely and hence the financial markets are set to price a deal that involves increased trade frictions that will impact economic growth. This scenario combined with the fact that the UK economy is already weak leads us to believe that the BoE will ease its monetary stance – probably in Q2; at the May meeting.”
“The December MPC vote of 7-2 highlights the skew in risk toward a rate cut and we see the economic backdrop justifying that, which will weigh on GBP in H1 this year.”
“The fact that we see only a modest removal of Brexit uncertainty while an FTA is negotiated between the UK and the EU and given we expect a BoE rate cut, possibly in May, we see the pound remaining flat with downside risks through H1. As we move toward year-end, assuming progress is made toward an FTA, even if only incorporating barebones, we would expect GBP to then strengthen more notably.”