GBP: Politics is a headwind, but a broad-based rise expected - ANZ

According to Brian Martin, Senior International Economist at ANZ, UK politics can be unsettling and provide a headwind to a sustained appreciation in the GBP, but a more certain macroeconomic backdrop and broad support in Parliament for open trading relations with the EU should be sterling positive in coming months.

Key Quotes

“A relief rally for sterling makes sense in the event of an agreement, but the next phase of the Brexit talks (starting next April) may prove difficult. The European Parliamentary elections next year have the potential slow progress in trade talks.”

“The leave arm of the Conservative Party will be very focused on ensuring the UK leaves a temporary customs arrangement before the next UK election in May 2022. If the Labour Party win the next election, its policy is to have a permanent customs union with the EU, so the UK might never leave such an arrangement.”

“There could be a challenge to the leadership after the UK leaves the EU on 29 March 2019. We expect broad based appreciation in GBP against a basket of currencies.”

“Under a transition arrangement, we expect the BoE to raise the bank rate by 50bps next year, which would underscore this GBP view.”