(Bloomberg) -- Pound analysts are struggling to find reasons to be optimistic even after the immediate threat of a no-deal Brexit was lifted.
Sterling strengthened this week as the U.K. and European Union agreed to extend the divorce deadline to Oct. 31, but its gains were well short of what strategists had previously predicted for such a scenario. The currency’s prospects still remain weighed down by the threat of longer-term economic damage from Brexit, along with the heightened domestic political risks.
“My optimism on sterling’s rebound even on a deal being signed has lessened,” said Jane Foley, head of strategy at Rabobank. “It’s the outlook for the U.K. economy, but also the Brexit process has left in its wake a real mess for U.K. politics.”
Sterling was up 0.5 percent for the week as of Friday afternoon in London, but remains close to the $1.31 level it has traded around over the past few weeks. A survey of strategists last month found they expected the pound to rally to $1.33 on a Brexit extension. The currency will struggle to lift off from current levels in the next six months, according to strategists at Rabobank and Mizuho Bank Ltd.
While a no-deal outcome has been priced out, investors now see a risk of a snap election or a leadership challenge to Prime Minister Theresa May. She has previously offered to step down if lawmakers backed her Brexit deal.
Talks between May’s Conservative Party and the opposition Labour Party will continue next week even with Parliament in recess, as they aim to find a compromise plan to break the Brexit deadlock. U.K. data will be the main market focus otherwise, with inflation and jobs reports set to provide a further insight into the health of the economy.
“My sense is the overall trend for the pound prior to EU elections is now lower,” said Neil Jones, head of hedge-fund currency sales at Mizuho. “A six-month delay continues the stalemate and uncertainty, hampers FDI demand, yet is insufficient time for bullish pound features to kick in such as a second referendum or no Brexit.”