Morgan Stanley and Goldman Sachs have both confirmed a reduced negative outlook on the pound with both citing a more supportive Bank of England (BoE) and increased optimism of an autumn Brexit trade deal. The pound to euro is continuing to hold above 1.10 and pound to dollar above 1.30.

Following “Super Thursday,” concern that the BoE may look at zero or negative interest rates later this year has lessened and a clearer indication that quantitative easing will be the bank’s preferred policy has significantly increased sentiment. The prospect of negative interest rates has weighed on the pound during the crisis as BoE Governor Andrew Bailey and Chief Economist Andy Haldane have previously stated that all monetary options would be considered.

A more hawkish central bank coupled with increased optimism of an autumn Brexit trade deal has provided some support for the pound. With the BoE unlikely to announce any short-term change to their current policy and Brexit headlines likely to remain subdued as the UK and EU take a break from negotiations, the pound faces less downward pressure. However, a Brexit deal is far from guaranteed with both the UK and EU still unable to break the deadlock.

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Continued EU access to UK fishing waters remains one area of dispute although it has been reported that compromise could be found. Michel Barnier recently admitted that the EU could be willing to reconsider their position. However, the biggest issue is the EU’s demand for the UK to adhere to a “level playing field” although more specifically, state aid. Brussels is concerned that a post Brexit Britain could undercut EU firms by providing greater subsidies to UK firms and so therefore wants the UK to abide by the same rules as other EU states, something David Frost has told Michel Barnier an independent country simply cannot sign up to.

 

Whilst negotiations will continue, it is unlikely a breakthrough will be made until October when EU leaders meet as the current mandates just do not allow a compromise to be found. As such, whilst the outlook for sterling has improved, pound to euro and pound to dollar rates could see significant volatility as the time to agree a Free Trade Agreement reduces. Morgan Stanley see a “mixed deal” being carved out, which will see the UK leave the Single Market but maintain close alignment and importantly, zero tariffs on goods. Morgan Stanley now see a 60 rather than 50 percent chance of this happening.

Covid-19 Uncertainty May Stall Recovery

The Bank of England has continued to cite a V-shaped recovery for the UK economy, although accountancy firm EY using the same economic forecast model said that it could be 2024 before the UK recovers fully due to a change in personal and business behaviour.

Unemployment levels in the UK remain low as the government’s furlough scheme remains in place but many suspect unemployment numbers to rise later this year when the furlough scheme ends and businesses are forced to make redundancies. A study by The Chartered Institute of Personnel and Development confirmed the number of employers expecting to make redundancies had leapt to 33 percent from 22 percent for the 3 months to the end of September.

It is also important to the UK economy that children return to school in September and Prime Minister Boris Johnson has urged local authorities to keep schools open. Education is crucial to children’s development but in the broader economic picture, education contributes to GDP and if children are at home, parents will struggle to return to work.

The UK is also looking at scrapping the daily Covid-19 death toll and reporting on a weekly basis following an investigation into Public Health England’s method of counting, which revealed the number of Covid-19 deaths are being over-exaggerated. Oxford University experts revealed a high proportion of Covid-19 deaths relate to patients who recovered from the virus weeks or months prior. In the current method of counting, you could recover from Covid, die in a car accident 3 months later, and your death would be reported as Covid.

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