GBP/USD: Sustained pound recovery incompatible with fiscal deterioration – ANZ
|Brexit trade talks are set to continue into mid-November amid reports of progress, but there is a long way to go. Meanwhile, shrinking UK private sector and negative rates are set to weigh on GBP, economists at ANZ Bank apprise.
Key quotes
“The UK and EU are engaged in intense negotiations to break the deadlock in the bilateral trade talks. There is hope of progress emerging on level playing field arrangements and state aid, with both sides working towards a dispute resolution mechanism. Fisheries remain a barrier. Economically small, it is a very emotive topic.”
“Recent optimism does not obviate the fact that much progress still needs to be made in the talks and the outcome is uncertain. Irrespective of whether there will be agreement on tariffs and quota-free access, trade friction is set to rise. Border checks and bureaucracy will slow down the flow of goods and increase costs. Nontariff barriers are a significant risk in the absence of a comprehensive agreement.”
“In the UK, the COVID-19 economic shock is curtailing the government’s earlier spending plans. Public sector debt is now 103.5% of GDP vs 80.8% at the end of 2019. The government has cancelled its three-year spending review. The risk is that a smaller private sector will carry the onus for re-engineering growth and containing debt. Disinflationary pressures are intense, and we expect the BoE to move to negative interest rates next year, which will weigh on GBP.”
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