Breaking News
0
Ad-Free Version. Upgrade your Investing.com experience. Save up to 40% More details

Point/Counterpoint: The Case for the Pound

ForexSep 12, 2020 07:19AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 
© Reuters

By Geoffrey Smith and Peter Nurse

Investing.com -- Turmoil involving Britain’s negotiations with the European Union over their trading relationship has hit sterling hard this week.

Prime Minister Boris Johnson now threatens to break the divorce agreement with the EU, prompting threats of legal action. The odds of a no-deal Brexit are increasing, along with the likelihood of an ugly outcome. The pound has fallen against the euro, plunging again on Friday to 1.08.

Investing.com's Geoffrey Smith argues the bull case for sterling, while Peter Nurse counters with reasons why it will continue to fall. This is Point/Counterpoint.

The Bull Case

It’s not often that you get to make an argument like this, but the bull case for sterling rests largely on the sheer spinelessness and brazen opportunism of the British government.

To sell sterling at these levels, you have to believe that the U.K. government is as stupid as it has pretended to be this week. You have to believe that it will go through with its threat to end the post-Brexit transition period without  any deal at all to ensure smooth trade with the EU after Dec. 31 , and that it's willing to risk the anger of the U.S. by wrecking the Northern Ireland peace process in the bargain.

You have to believe that Johnson and his team seriously think they can win another election after pursuing a course of action that – for all the various arguments over sovereignty – can only result in more acute short-term pain for the British economy, and probably a higher level of chronic pain thereafter. You also have to believe that the EU, in the depths of its worst economic contraction ever, will willfully make things worse for the sake of an abstract faith in its Single Market.

The market has not believed that for most of the last four years, and its skepticism has been well founded on a succession of messy compromises that has delayed the hard choices between smooth trade and sovereignty. More of those compromises lie ahead, despite all the negotiating bluster to the contrary this week.

Certainly, the Withdrawal Agreement that was supposed to be the basis of a comprehensive post-Brexit deal appears dead. But ending the transition period without a comprehensive deal, regulating all the things that EU membership used to regulate from fisheries to international arrest warrants, is not the same as leaving without any mitigating arrangements at all.  

It is already clear that the Bank of England and European Central Bank get on well enough – and are mature enough – to ensure that financial flows, underpinned by enforceable contracts, will carry on in January whatever happens. It is not hard to imagine a patchwork of sector-specific agreements being stitched together out of various short-term fixes to cover essentials such as perishable food and medicines. With time, such stopgap fixes can be smoothed out into more coherent and durable structures.

Barring hyperinflation – which is not a risk for the foreseeable future - currencies don’t go to zero. Over 20 years, EUR/GBP has never been able to sustain a level beyond 0.9250 for any length of time. Barring a failure of statecraft without parallel since the 1930s, the odds are on the pound’s side at these levels. 

The Bear case

It’s true the recent turmoil surrounding Britain’s negotiations with the European Union over their trading relationship has hit sterling hard this week, but this doesn’t mean more losses aren’t possible, or indeed likely.

After all, while the pound has reversed some of its gains against the dollar after setting a high for the year at the start of this month, it remains higher than its 2019 average and well above the March low.

The move by the U.K. government to table a bill that would breach the existing withdrawal agreement, a move London openly says would contravene international law, has seen trust between the two sides largely disappear.

Indeed, investment bank Morgan Stanley increased the likelihood of Britain and the European Union ending up trading on World Trade Organisation terms to 40% from 25%.

"The risks are skewed to a harder outcome... bumping up the probability of our bear case of a WTO-style outcome to 40%. We still expect a delay in implementing the deal," the bank’s analysts said, in a note.

Even then, 40% isn’t 100%. Which means unless one of the sides is prepared to eat an awful lot of humble pie, sterling has room to move a lot lower.

Aside from the turmoil with the Brexit negotiations, worries surrounding the Covid-19 virus are on the rise. 

A new study by Imperial College suggested the spread of the coronavirus is speeding up across all parts of England, with the number of cases doubling about every week. 

That suggests Wednesday’s new restrictions on bars and restaurants will just be the start of a new series of lockdowns.

Britain has suffered the highest number of deaths from Covid-19 in Europe, and lockdown measures imposed meant the economy contracted a record 20.4% in the second quarter, by far the weakest quarter of the major industrialized countries in Europe.

Output did expand by 6.6% in July. But the furlough program, under which the government has paid as much as 80% of the wages of some 9.6 million workers, is due to be wound down altogether at the end of next month. More redundancies and thus a further hit to output are likely.

“We're likely to see the pace of expansion slow in August/September and stall as we head into the winter as the 'mechanical rebound' ends and unemployment rises,”  said analyst James Smith at ING, in a note Friday.

This puts next week’s Bank of England meeting firmly in focus.

BOE Governor Andrew Bailey said last month the central bank has plenty of room to add more monetary stimulus, and it’s beginning to look like he may need to use this, a sterling negative.

“We think the overall size of the U.K. economy is unlikely to return to pre-virus levels until late 2022, or perhaps later. This in turn will increase the pressure on the Bank of England to increase their stimulus package at the November meeting,” Smith added.

 

 

Point/Counterpoint: The Case for the Pound
 

Related Articles

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Comments (8)
Shawn Foster
Shawn Foster Sep 13, 2020 10:06AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
They have to make exiting the EU look like a bad thing to discourage other countries from leaving. UK will probably get a better deal if they play along in the short term and pretend brexit is a disaster.
Lawrenti Berija
Lawrenti Berija Sep 12, 2020 12:31PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
buy gold or miners without leverage - cable, eur , usd are toast all together
John Raymond
John Raymond Sep 12, 2020 12:13PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
66% of uk trade is with the eu. that means a significant negative hit to the uk economy even with an agreement!
jj mm
jj mm Sep 12, 2020 11:38AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
UK has devalued GBP with no BOE intervention. Now they have more ammunition it more devaluation needed
Dietmar Stahl
Dietmar Stahl Sep 12, 2020 11:16AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
EU would only drain more money
Dietmar Stahl
Dietmar Stahl Sep 12, 2020 11:15AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
No deal is good for UK
Iyke Nnaa
Iyke Nnaa Sep 12, 2020 11:06AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
more downside anticipated for the pound
mario can
mario can Sep 12, 2020 11:03AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
be bullish on the pound fyi imma permabear
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
or
Sign up with Email