The strong downward movement in the pound has shown in past days that the market has increasing doubts about an amicable agreement between the UK and the EU, according to Antje Praefcke, analyst at Scotiabank. In the short term, the pound will therefore remain under pressure.
“Investors in the pound have responded very nervously to Prime Minister Theresa May’s speech at the Conservative Party Conference, in which she suggested a hard line would be taken in the exit negotiations with the EU. Such a course holds substantial risks and the resulting uncertainty has left its mark on the pound.”
“After all, the UK relies on capital imports and if these inflows are disrupted, this could trigger a painful correction of the current account balance. And the longer the pound remains under pressure, the greater the risks of a self-reinforcing downward spiral amid the rising uncertainty. That said, the Bank of England (BoE) already made it clear in the wake of the referendum in the summer that it would intervene if necessary.”
“Comments from the BoE to this effect could lend support to the pound but market scepticism prevails in the short term in the absence of such signals. The pound will therefore remain under pressure short-term.”
“In the medium term, we see a chance of an amicable agreement and hence a recovery of the pound, but given the risks there is substantial downside potential at the moment for uncovered sterling positions.”