LONDON (Reuters) – Sterling will lose recent gains against the dollar and weaken further if Britain does not ask for an extension to its Brexit transition period by a June 30 deadline to allow more time for talks on a trade deal with the EU, a Reuters poll found.
The currency <GBP=> has strengthened this week, trading at a one-month high of around $1.26 on Wednesday, as Britain indicated that it might be willing to compromise on some sticking points to reach a final Brexit deal.
Talks between the two sides, aimed at setting out a new future with Britain outside the European Union for the first time in 47 years, have all but stalled, but there are hopes for a compromise.
Britain formally departed the EU on January 31, three and a half years after a surprise referendum vote in favour of leaving, and the transition period – during which Britain remains in the EU single market and customs union – is due to finish at the end of this year.
Prime Minister Boris Johnson has until the end of June to ask for an extension and has repeatedly ruled this out. All but two of 23 respondents to an additional question in the poll said sterling would weaken in early July if there is no extension.
“The fading prospect of an extension to the post-Brexit transition period, and the risk of supply chain disruption at the start of 2021, casts a cloud over (Britain’s) GBP outlook,” said James Smith at ING.
BREXIT BACK IN SPOTLIGHT
“Brexit is back in the spotlight. There’s little to suggest we should expect any real progress, and that’s one reason why we’ve seen some risk premium creep back into the pound.”
The pound is expected to have weakened to $1.23 by end-June, according to the wider poll of over 50 foreign strategists taken this week.
Still, Reuters polls of economists have repeatedly said the two sides would eventually thrash out a free trade deal and the pound was expected to have strengthened around 1.6% to $1.28 in a year.
“Our central scenario still assumes that the UK will leave the EU in an orderly fashion, most likely on 31 December 2020 and with a free trade agreement being a crucial part of the new relationship,” said Roberto Cobo Garcia at BBVA.
“With the UK and the EU economies already paying a heavy toll from COVID-19, officials on both sides have very few incentives to disrupt the current system even more and to add extra layers of uncertainty at such a critical time.”
Britain has suffered the highest death toll in Europe from COVID-19 and a government-imposed lockdown to try and quell the spread of the coronavirus has wreaked havoc on the economy. GDP is expected to contract 17.5% this quarter.
Countries across Europe have also seen their economies crippled and the euro common currency <EURGBP> will move little against the pound, the poll found. In one month a euro will get you 90 pence and in a year it will be worth 88p.
(Reporting by Jonathan Cable; Polling by Sumanto Mondal and Hari Kishan; Editing by Mark Heinrich)