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Weak Outlook for Sterling Goes Beyond Brexit

With Brexit uncertainty unlikely to be resolved soon and the U.K. economy slowing, the outlook for the pound is bleak. But even a quick Brexit resolution might fail to boost the currency, according to analysts.

After rallying in January on hopes for a softer Brexit or a delay in the U.K.’s exit from the European Union, sterling has lost nearly 3% in recent weeks.

U.K. Prime Minister Theresa May on Tuesday is set to speak before Parliament as the March 29 Brexit deadline nears. Meanwhile, data Monday showed the U.K. economy grew at its slowest pace in six years in 2018 as the Brexit negotiations weighed on investment decisions.

“The likelihood of May and Sterling going over the cliff on March 29 increases by the minute,” analysts at Commerzbank wrote in a note to clients.

Even in the case of a quick Brexit resolution, however, the pound’s weakness could still drag on due to fundamental factors.

Simon Derrick, chief currency strategist at BNY Mellon said a slowdown in the U.K. housing market since 2014 has been matched by a weakness in the pound which precedes the 2016 Brexit referendum. The pound traded above $1.72 in the summer of 2014.

The Royal Institution of Chartered Surveyors’ index of house prices has been declining since then, with the pace of the slowdown accelerating in the fourth quarter of 2018, as have both the Nationwide and the Halifax house price surveys, Mr. Derrick said.

“This suggests that while it’s highly likely there would be a bounce in GBP should the Brexit negotiations result in a business/investment-friendly outcome, this might prove weaker than imagined,” he said.
Source: Dow Jones

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