Pound Rally Seen Capped to 2018 Level on a Brexit Trade Deal

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Pound Rally Seen Capped to 2018 Level on a Brexit Trade Deal
Credit: © Reuters.

(Bloomberg) -- The ink is barely dry on the historic outline for a Brexit trade deal, yet pound prognosticators are delivering a reality check on the rally.

The general consensus is that much of the optimism is already priced in, with the currency up more than 9% since the end of June while the relative cost of hedging pound weakness over the next year at its lowest since March.

Investors are conscious of the limitations of any incoming accord and are looking ahead to the prospect of further coronavirus restrictions and the U.K.’s bleak economic outlook.

The pound will probably advance to $1.37 if the U.K. and European Union finalize a trade deal on Christmas Eve, according to Credit Agricole While that’s the highest level since May 2018, it’s just under a 1% gain from Thursday’s peak of $1.3586.

Canadian Imperial (JO: IPLJ ) Bank of Commerce says sterling could touch $1.3715, although it recommends selling the rally.

“The upside is pretty marginal now,” said Adam Cole, RBC Europe Ltd.‘s head of currency strategy. “Taking the bookies’ quotes as a proxy, the probability of a deal rose from 50% at the weekend to 90% yesterday, so I think the repricing is largely done.”

Any deal would conclude more than four years of fractious negotiations since the U.K.’s referendum on EU membership, setting up a new era of trade relations between Britain and the bloc. The uncertainty over the the country’s trading future and the expected economic damage from Brexit has held the pound captive below its pre-referendum range.

The caveat is that with liquidity diminishing during the Christmas period, the pound’s reaction to a decision over trade may be more volatile. Manuel Oliveri, a foreign-exchange strategist at Credit Agricole (OTC: CRARY ), said participation may be low because many clients have already closed their books for the year.

It’s one reason why an accord could send the pound soaring as much as 3%, before ending the day up 2%, Bob Stoutjesdijk, a Rotterdam-based fund manager at Robeco Institutional Asset Management, said on Wednesday.

©2020 Bloomberg L.P.


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