Forget Brexit, long live the pound

Dünya Executive - - REPORT - Murat BASBOGA

Market sentiment regarding the possibilit­y of a much softer version of Brexit, where the UK could remain within the single market seems, to have improved considerab­ly in recent days and has been reflected in recent sterling strength against the euro. Economists from Standard Chartered and Deutsche Bank agreed with the view that the dollar is in the early stages of a multiyear downtrend that will see euro/dollar scale 1.40 over the next two years and sterling/dollar rising to near 1.60. These forecasts are more bullish than the market. The Bloomberg survey of analysts puts the euro at 1.25 at the end of 2019 (with a range of estimates from 1.11 to 1.40). Dollar/yen is put at 110 according to the median forecast and sterling/dollar is put at 1.40. Last week began on an optimistic note following comments made by the French President Emmanuel Macron over the weekend in which he said the UK could “have deeper relations than some other” countries, highlighti­ng that the EU had closer links with Norway than with Canada. However, it remains unclear what would be ‘special’ in the future relation as he highlighte­d all the usual preconditi­ons to trade with the EU meant to preserve the single market and EU interests. Neverthele­ss, the novelty of his more constructi­ve statements caught the markets’ attention, contrastin­g with the steadfast posture of EU chief negotiator Michael Barnier. Markets remained buoyed by the possibilit­y of a softer Brexit as Secretary of State David Davis testified to the Commons Brexit Select Committee. However, his apparent change in tone regarding the European Court of Justice “red lines” or regulatory alignment with the single market may have been more about Mr Davis balancing the Brexit divisions in Parliament rather than an actual change in direction by the government. British Prime Minister Theresa May is expected to clarify the government’s position regarding the negotiatio­n end-state ahead of the long-term relation talks. As the market dynamics change too quickly to observe, probably the only winner is emerging market currencies, at least for now.

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