In the first day of trading since the EU and UK announced a post Brexit free trade partnership, sterling has dropped one percent against the euro and three-quarters of a percent against the US dollar. With many London traders still on holiday, we may not see the full movement of the pound until January when trades are placed.
Many analysts anticipated a post Brexit surge once a trade deal had been agreed. However, in reality the overall sense is that the UK currency will likely remain under pressure near-term. This suggests the markets overwhelmingly priced in a deal being reached.
Another factor affecting the pounds value could be reports from the independent Office for Budget Responsibility has forecast the UK will see a 4% loss in economic growth over fifteen years compared with if the UK stayed within the EU bloc.
UK Parliament is expected to ratify the free trade deal this week. There has been limited criticism from the Conservative and Labour Party to suggest any issues getting through Parliament. Currently, the trade deal does not account for over 70% of UK economic output which will need to be negotiated further, including the UK services industry which makes up a substantial percentage of the UK economy.
Analysis from Goldman Sachs are positive on the UK economy in 2021 citing three features in addition to the Brexit deal:
- The services sector will rebound strongly in the second quarter of 2021
- Half the UK population is expected to be vaccinated against covid-19 by April
- Monetary and fiscal policy will be supportive of growth
The current consensus forecast for UK GDP in 2021 is 5.4% but the investment bank forecast 7% and see the pound into euro interbank rate rising to 1.16 over the coming months.
In this volatile period, make sure you are keeping in touch with your account manager here at Foreign Currency Direct.
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