Sterling set to lose recent gains against the dollar and weaken further if Britain does not ask for an extension to its Brexit transition period by a June 30 deadline to allow more time for talks on a trade deal with the EU.
Talks between the two sides, aimed at setting out a new future with Britain outside the European Union for the first time in 47 years, have all but stalled, but there are hopes for a compromise.
Britain formally departed the EU on January 31, three and a half years after a surprise referendum vote in favour of leaving, and the transition period – during which Britain remains in the EU single market and customs union – is due to finish at the end of this year.
Prime Minister Boris Johnson has until the end of June to ask for an extension and has repeatedly ruled this out. All but two of 23 respondents to an additional question in the poll said sterling would weaken further in early July if there is no extension.
Brexit is back in the spotlight. There is little to suggest we should expect any real progress, and that’s one reason why we’ve seen some risk premium creep back into the pound.
Our central scenario still assumes that the UK will leave the EU in an orderly fashion, most likely on 31 December 2020 and with a free trade agreement being a crucial part of the new relationship.
With the UK and the EU economies already paying a heavy toll from COVID-19, officials on both sides have very few incentives to disrupt the current system even more and to add extra layers of uncertainty at such a critical time.
Britain has suffered the highest death toll in Europe from COVID-19 and a government-imposed lockdown to try and quell the spread of the coronavirus has wreaked havoc on the economy. GDP is expected to contract 17.5% this quarter.