March 3, 2020 / 3:31 PM / a month ago

Sterling to bounce this year in anticipation of EU-UK trade deal - Reuters poll

LONDON (Reuters) - Sterling will be around 5% stronger against the dollar in a year, driven by hopes Britain and the European Union agree a trade deal, but the outlook is clouded by fractious negotiations and the coronavirus outbreak, a Reuters poll found on Wednesday.

FILE PHOTO: British Pound Sterling banknotes are seen in a counter machine at the Money Service Austria company's headquarters in Vienna, Austria, November 16, 2017. REUTERS/Leonhard Foeger

However, polling was conducted before the United States Federal Reserve cut interest rates on Tuesday in an emergency move designed to shield the world’s largest economy from the impact of the virus. The Fed’s rate cut extended sterling’s rise against the dollar.

The pound GBP= had a torrid February as the spread of the virus sent investors rushing to safe-haven currencies and British Prime Minister Boris Johnson's hardline approach to trade talks restoked fears of an acrimonious divorce from the EU.

Britain left the bloc on Jan. 31 and if an agreement is not reached by year-end - Johnson has repeatedly said he won’t ask for an extension to the transition period - the two sides would have to trade under World Trade Organization rules.

Reuters polls have consistently said that would be a bad outcome for both the economy and the pound. But these surveys of economists since the June 2016 referendum vote to leave have all predicted an EU-UK trade deal will be thrashed out. [ECILT/GB]

Median forecasts in the Feb. 28-March 3 poll of around 50 foreign exchange strategists said the pound would steadily gain and be worth $1.29 in a month, $1.32 in six months and $1.35 in a year.

“We see a ‘barebones’ deal being reached by year-end but only after intensified bouts of uncertainty around key periods (in June and September), which will weigh on the pound,” noted analysts at MUFG. They see the pound at $1.34 in a year’s time.

“A rally toward year-end on initial relief of a deal being done is possible.”

Sterling was trading near 4-1/2 month lows of $1.277 on Tuesday as the first round of trade negotiations, due to last until Thursday, were proving fraught. It rallied to $1.28 after the surprise Fed move.

Also clouding the outlook, market expectations have grown for other central banks to cut interest rates to limit fallout from the coronavirus, including possibly through coordinated action.

There is also a UK government budget review due on March 11 that most analysts said will be expansionary, which could also alter the pound’s trading path.

Against the EU common currency, the pound is going almost nowhere, the poll showed. One euro EURGBP= will be worth 85 pence in one-, six- and 12-months compared to the 86.9p it was worth on Tuesday.

Polling by Khushboo Mittal and Sumanto Mondal; Editing by Mark Heinrich

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