Sterling to gain on hopes for UK-EU trade deal by year-end

Sterling will be nearly 4% stronger in a year than it is now, according to a Reuters poll of market strategists, based on expectations that Britain will secure a trade deal with the European Union this year despite its tough initial stance. On Monday sterling took a pummelling after Prime Minister Boris Johnson set tough terms for the trade talks.

Some of the forecasts in the Reuters poll were gathered before Johnson's speech. Britain left the EU on Friday and Johnson's comments on Monday have rekindled fears of a cliff-edge - whereby no trade deal is agreed - at the end of an 11-month transition period which Johnson has repeatedly said he won't ask to extend.

Foreign exchange strategists in Reuters polls have repeatedly said that leaving without a deal, and so trading on World Trade Organisation rules only, would be rough for the economy and the worst outcome for the pound.

The currency ended January on a high note after the Bank of England surprised many by leaving borrowing costs on hold but fell as much as 1.7% to $1.2984 on Monday. It was trading around $1.30 on Tuesday after better-than-expected construction data.

Median forecasts in the Jan. 31-Feb. 4 poll of 65 strategists showed the pound would be up at $1.31 in a month, $1.32 in six months and then $1.35 in a year's time. That is still well below the $1.50 it was trading at before the June 2016 referendum, when Britons voted by 52% to 48% to leave the world's largest trading bloc.

With time short to agree even a bare-bones deal, economists in a Reuters poll last month said there was a median 20% chance of a disorderly departure at the end of the transition period, during which existing agreements apply as if Britain were still an EU member.

Johnson's emphatic December election victory stoked hopes for a Brexit bounce to the economy and the BoE said on Jan. 30 a recent pick-up in growth had weakened the case for it to lend more monetary support. "A bounce in UK economic growth helped by a good-sized fiscal stimulus in Q2 remains our base case," said James McCormick, global head of desk strategy at NatWest Markets.

"We still like buying sterling and the BOE's decision to pass on a cut last week (which was a surprise to us) has given the sterling trend some renewed momentum." In contrast to the BoE, the US Federal Reserve and European Central Bank eased policy last year.

But the coronavirus outbreak spreading further beyond China's borders has raised more global growth risks and is set to keep the US dollar, which has dominated most others in foreign exchange markets for around two years, firmly on its throne well into 2020.

With the outlook for euro zone growth already lukewarm before the virus outbreak and no more policy changes expected from the ECB, little movement is expected between the pound and the common currency. Trading around 84.9 pence on Tuesday, in one-, six- and 12-months time one euro will be worth 85.0p, the poll found.