Sterling to dip this year as Brexit uncertainty swirls

LONDON: Sterling, which was approaching a five-month high on Wednesday, is expected to lose some of those gains this year amid Brexit and coronavirus fears before recovering in 2021, a Reuters poll found.

The pound registered its biggest monthly rise in more than a decade in July, although its ascent was mainly due to a weaker dollar after a surge in US coronavirus cases and unease about the upcoming presidential election.

But fears of a second wave of infections in Britain, already the hardest-hit European country, have capped the pound's advance and according to a new study published on Tuesday a resurgence of the pandemic could be twice as bad as the initial outbreak.

Also containing sterling strength is a weak economy and growing pressure to strike a Brexit trade deal before a transition period ends in December, prompting traders and investors to be wary of the pound's prospects.

The July 31-Aug. 5 poll of around 60 foreign exchange strategists said the pound would dip to $1.29 in a month and to $1.28 in three months before returning to current levels in a year's time. It was trading around $1.31 on Wednesday.

"The dip is because it seems like the uncertainty over Brexit will continue until we get to around September or October, so until we know what is going on it can't trade as well," said Jordan Rochester at Nomura.

"I lean towards a deal, but it doesn't mean the same euphoria for sterling as it used to. The deal will be bare bones - it might be that in Q1 we are still adjusting to a new trading agreement and you do see all of the foretold Brexit border chaos."

Illustrating the murky outlook, the 12-month forecast horizon was wide - from $1.18 to $1.44.

Reuters polls since the June 2016 referendum to quit the EU have consistently said the two sides would eventually agree a free-trade deal, but talks have been troubled.

Without an agreement, trade and financial ties between the world's fifth-largest economy and its biggest trading partner would collapse overnight, spreading havoc among markets and businesses.

Against the euro, little movement was expected. One euro was worth around 90.3 pence On Wednesday, and the poll suggested it would be worth 90.0p in a month and 89.0p in a year.