UK: EU trade talks should support GBP – ANZ

In view of Philip Borkin, Research Analyst at ANZ, progress on trade talks should support sterling as much bad news on UK growth is priced in.

Key Quotes

“Sterling’s resilience in recent months has been impressive. Despite a very unsettled domestic political backdrop, difficult Brexit negotiations and weaker growth, the pound has remained broadly stable.”

“Huge uncertainty is hanging over the UK economy as it transitions towards a new equilibrium outside the EU. But there are reasons to be cautiously optimistic on the outlook for sterling.”

“Ahead of the 14 December EU Summit, it is reported that the UK cabinet is prepared to significantly increase its “Divorce Bill” offer to around GBP40bn, from GBP20bn at present. That may help to unlock the current negotiations, with the EU deeming progress to be significant.”

“European business groups do not want a hard Brexit. It is not in either the UK’s or EU’s interest to erect material trade barriers, given the risks to growth they would pose on both sides.” 

“Apart from the UK being a major trading partner of the EU, it is also the capital for EU. To erect damaging financial barriers could pose a material threat to the efficacy of the ECB’s expansive monetary policy, upon which the EA recovery is still very dependent.”

“The BoE has recently raised rates, and further gradual rises should be forthcoming. Inflation, as it falls back in coming months, should support private consumption growth. Meanwhile, greater clarity around Brexit arrangements as 2018 progresses should boost wavering business confidence, employment and investment. Given that uncertainty has been the biggest driver of GBP weakness, a rise in certainty may well support sterling.”