Big Recovery in British Pound vs. Euro if May Goes Soft on Brexit

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The pound has risen 0.3 per cent against the euro yesterday following a better-than-expected construction PMI release. This has pushed the pound euro exchange rate up to a level of €1.132 as of 7:30 GMT today. The sterling however, is still a far outcry from the pre-Brexit GBP rates of €1.30 back in 2016. So what would restore the GBP to its former glory?

According to the independent economics research house Pantheon Macroeconomic a so-called soft-Brexit by the UK government could be the sterling’s biggest chance of a recovery.  

The call comes at the start of a busy week in terms of the UK’s Brexit journey with Monday bringing with it news of a ‘third way’ for a future trading relationship being proposed by the UK government. This week will also see a critical meeting of the Cabinet to push for an unified stance on what the future relationship will look like.

The details of the new ‘third way’ will not be revealed until after the meeting of the Cabinet at the Prime Minister’s country retreat, known as Chequers. Any Brexit-related updates will therefore cause significant volatility to GBP pairs this week.

In the long run, Pantheon Macroeconomic expect GDP to rise by just 1.2% year-over-year in 2018 while the Bank of England’s policy-making body, the MPC, thinks trend growth is about 1.5%. Hence, Pantheon believe disappointment with UK growth will cause the Bank of England (BoE) to keep interest rates unchanged this year. It is important to note that markets are pricing in a 60% chance of an interest rate rise in August, if these expectations are proven to be too optimistic we could very well see another pulse of GBP selling in response.

While the outlook for the remainder of 2018 appears subdued, Pantheon tell clients 2019 should see a rapid improvement in fortunes for the economy, and Sterling by extension. Much of the assumption for a revival in UK economic activity does however rely on a soft Brexit  scenario. The move to a soft Brexit will be instrumental in shaping a strong rebound in the value of the British Pound according to Pantheon Macroecnomics.

Sources: poundsterlinglive,  Tuesday, 03 July 2018 06:51

*Please note that this article is not meant to be understood or interpreted as investment advice or suggestion of an investment strategy with respect to any financial instrument.

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