Pound dips as Brexit deadline looms and concern mounts on UK finances

Oscar Williams-Grut
·Senior City Correspondent, Yahoo Finance UK
·3-min read
Steve Bray, right, a pro EU campaigner during a protest against a Brexit no deal near Parliament in London, Wednesday, Nov. 25, 2020. The European Union has committed to be "creative" in the final stages of the Brexit trade negotiations but warned that whatever deal emerges, the United Kingdom will be reduced to "just a valued partner," far removed from its former membership status. (AP Photo/Kirsty Wigglesworth)
Steve Bray, right, a pro EU campaigner during a protest against a Brexit no-deal near Parliament in London, 25 November 2020. Photo: Kirsty Wigglesworth/AP

The pound was lower against key pairings on Thursday morning, amid mounting fears about the state of the UK economy and little sign of progress in Brexit talks.

Sterling was down 0.2% against the euro to €1.1208 (GBPEUR=X) in early trade in London. The pound was down 0.1% against the dollar at $1.3366 (GBPUSD=X).

Both pairings remained near two-month highs, suggesting investors were consolidating rather than exiting positions.

The pound remained near a two-month high against the euro. Photo: Yahoo Finance UK
The pound remained near a two-month high against the euro. Photo: Yahoo Finance UK

However, concerns are growing about the state of the UK economy. The Office for Budget Responsibility (OBR) published new forecasts on Wednesday showing Britain is on track for its worst year since 1709. The forecasts were published alongside a spending review from the UK chancellor Rishi Sunak, in which he warned COVID-19 was likely to leave lasting scars on the economy.

The government budget deficit is set to be an eye-watering £394bn ($526bn), the OBR said. Government debt, already sky-high, is expected to continue soaring in the years to come. The OBR does not see anyway the government can balance its books on its current path and the state faces a £27bn hole in its budget in the years to come.

“Most of the eye-popping numbers in today's news come not from the Spending Review itself but from the accompanying Economic and fiscal outlook (EFO) document produced by the OBR,” said Brian Hilliard, chief UK economist at Societe Generale.

While concerns grow about the longterm sustainability of public finances, economists were cheered by the chancellor’s decision to not begin addressing these issues them at this stage. Experts said Sunak was right to focus on continuing to tackle the fallout from COVID-19.

“The fiscal policy response laid out in the Spending Review today should be put in the context of the economic shock that we face,” said Dr Hande Küçük, deputy director of macroeconomic modelling and forecasting at the National Institute of Economic and Social Research.

“This outlook justifies continued fiscal support in the coming years especially in the form of public investment to level up the economy and to limit the long-term damage.”

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Away from the spending review, currency traders remain focused on Brexit. Trade talks between the UK and EU continue with little sign of a break through.

“With just 5 weeks today until the transition period comes to an end, there’s still no sign of progress on the key issues in the trade negotiations,” said Jim Reid, a senior macro strategist at Deutsche Bank.

“It’s still not obvious from where or from whom the compromises will come, and the BBC’s Europe Editor Katya Adler tweeted yesterday that EU sources had said that the talks weren’t going well.”

Sebastian Galy, a macro strategist at Nordea, said the market was still pricing in a deal, as investors were “used to last minute EU decisions.” However, Galy said traders were underestimating the risk of talks collapsing in a stalemate.

“What we are faced with is a market used to things not breaking and being fixed,” he wrote in a note. “The risk therefore of leaving without a deal followed by a few months of chaos is underpriced by the market.”

The OBR said on Wednesday that a no deal Brexit would knock 2% off UK GDP next year. Earlier this week the governor of the Bank of England said a no deal Brexit would have a worse longterm effect on the UK than COVID-19.

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