Brexit time : GBP/EUR forecast for 2020 and beyond
As the UK formally leaves the EU on January 31 and crucial talks on a trade deal get under way, we look at the GBP/EUR forecast for 2020 and beyond.
It’s been a rollercoaster ride for sterling since 2016, when the UK voted to leave the European Union. As the British government prepares to fast-track trade talks with the EU in order to leave the bloc at the end of the year, we look at the GBP/EUR forecast for 2020 and beyond.
The pound was trading at around €1.32 before the UK voted to leave the EU on June 23, 2016.
Since then, the value of sterling has fallen, driven down largely by Brexit uncertainty. When Boris Johnson took over as Prime Minister in July 2019, the GBP/EUR price had traded between €1.13 and €1.09 from June 1 to July 31, 2019.
Immediately after the December 12 election, in which the Conservatives won a large majority, the GBP/EUR price surged through the €1.20 barrier – its highest level against the euro since April 2017.
Yet that euphoria soon gave way to concerns that London could fail to seal a trade agreement with Brussels by the end of 2020, which weighed on sterling's value.
Looking ahead, analysts expect GBP/EUR prices to mirror the news that emerges over the next 12 months, particularly details of any trade deal that may be secured between the UK and the EU.
Trevor Charlsley, senior markets advisor at AFEX, a payment and risk management solutions specialist says: “Since 2016 we had a downtrend, but that’s finished. We have an uptrend on our hands. Now [sterling] is probably going to be a buy on dips.”
Even if the upward trend continues, it’s unlikely to be smooth sailing for sterling during 2020.
GBP/EUR forecast for 2020
After more than three years of negotiations, the British government has set January 31 2020 as the date when the country officially leaves the European Union.
The next challenge will be the talks to secure a trade agreement and new partnership with the trading bloc by the end of the transition period, at the end of 2020.
During this period, the UK will remain in both the EU customs union and single market.
And although the UK can opt to stay within those arrangements for two more years, Prime Minister Boris Johnson has ruled out any extensions.
AFEX’s Charlsley says: “We will have a deal, but I think he’ll have a ‘skinny’ deal. It’s likely to be a ‘Canada light’, which means we will have a hard Brexit, which will be harder for the UK economy. And that will bring sterling down.
“You may get quite a deep retrenchment, maybe in the mid 2020s, but I would suggest that after that sterling is up and running and we are probably going to exceed 1.3514,” he adds.
The trade negotiations are likely to follow a similar pattern to the withdrawal talks, which may lead to volatility if news emerges that discussions are close to breaking down, especially as the year-end nears.
Credit Agricole’s Head of G10 FX research Valentin Marinov says: “The pound is likely to be volatile. We have a long-term positive view because we expect a happy ending to the Brexit saga, but until we get there will be a few hurdles along the way.”
Risk of no deal
Shamik Dhar, chief economist at BNY Mellon Investment Management, reckons a "no deal" Brexit is a risk for GBP/EUR 2020 forecast: "It's very real, because at the end of the day if we can't conclude a negotiation in that tight time frame... the default is a 'no deal' exit."
As a result, Dhar expects sentiment towards the UK currency to remain subdued over coming months.
The market is focusing on the possibility that the transition period may not be extended, leading to a hard Brexit. This could have repercussions for the UK economy and lead to Bank of England interest rate cuts hitting sterling.
The first key deadline for forex investors is July 1, as the UK and the EU cannot extend the transition period after this.
Johnson has ruled out requesting any extensions in July or at the end of 2020 and his uncompromising stance has made investors slightly more concerned about Brexit, helping the euro strengthen against sterling at the end of 2019.
The EU is also likely to take a tough stance from the outset of trade talks.
Mikael Olai Milhøj, senior analyst at Danske Bank, has written in a note: “As investors are likely to become impatient on the lack of progress, we expect EUR/GBP to move higher towards 0.89 in late Q3 or early Q4 and we cannot rule out a EUR/GBP as high as 0.90.
“We think a Brexit deal will lower EUR/GBP again to something like 0.84 when a final deal is in sight in late November or early December.”
Near-term GBP/EUR predictions
Since the GBP/EUR forecast for 2020 and beyond remains difficult to predict until trade talks open in the spring, investors should focus instead on the economy and the Bank of England’s comments on eventual rate cuts.
Two of the nine members of the Bank's Monetary Policy Committeehave voted to cut rates at their past two meetings, indicating that a rate cut may be in store for 2020.
Samuel Tombs, UK economist at Pantheon Macroeconomics, shrugs off that possibility, saying the latest services data suggest “the lifting of the threats of a no-deal Brexit in January and a business-hostile Labour government has triggered a recovery in activity.”
While survey data have shown a flat services sector in December, the trend marked an improvement from the contraction seen in November, suggesting that the improving data may weaken the argument for rate cuts.
However, the Bank of England has hinted that if global growth fails to stabilise or if Brexit uncertainties remain, monetary policy may need to reinforce the expected recovery in the UK’s gross domestic product.
“Investors are not pricing in more than a 50 per cent probability of a cut by year-end and a repricing of the BoE is thus likely to lift EUR/GBP further within a three-month horizon. On the back of this, we now expect the cross to move up towards 0.87 in the first quarter, possibly as early as ahead of the BoE meeting on 30 January,” said Danske’s Milhøj in his GBP/EUR analysis.
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