Sterling could fall toward $1.20 if UK-EU trade talks disappoint, strategists predict

Markets are underestimating the possibility that a trade agreement between the U.K. and the EU ends up resembling the much-feared “no-deal” scenario, some strategists say. The U.K. will officially leave the bloc at 11 p.m. London time on Friday, and both sides will then begin efforts to negotiate a new free trade agreement before the end of 2020. Little price movement is expected on the night, but the cloud of uncertainty is unlikely to lift for now.

Sterling rallied in December after U.K. Prime Minister Boris Johnson’s Conservative Party won a significant majority in parliament, enabling the passage of the Withdrawal Agreement and effectively ending fears of a damaging “no-deal” departure.

The pound was trading at just below $1.31 on Thursday after the Bank of England opted to hold interest rates steady. The Bank of England cited its reason for holding rates as a perceived economic pickup derived from promising survey data in January, and some analysts have suggested that with a lengthy negotiating process ahead, the pound may reattach itself to traditional economic indicators, rather than Brexit.

The Bank of England on Thursday forecast anemic U.K. GDP (gross domestic product) growth of 0.8% in 2020, and Ferridge suggested that with uncertainty over trade keeping investment levels low, any concern over a breakdown in negotiations could send sterling back to the low 1.20s against the dollar. “We’re around $1.30 now, we’ve been down to the low 1.20s before when people were worried about the no-deal Brexit, but if the realization is that really there isn’t going to be that much of a free trade agreement – it’s going to be less access to the single market than Canada has at the moment – then there’s got to be every risk that sterling falls back to those low 1.20s we saw before, particularly if growth stays low.”