Deal or no deal, the damage has already been done for the pound

The pound was set for its biggest weekly decline in almost four months after lawmakers dealt UK Prime Minister Theresa May another defeat in Parliament as they refused to endorse her Brexit strategy. (Bloomberg pic)

LONDON: Whether Theresa May gets her Brexit agreement or not, the pound’s troubles look far from over.

Even as the UK government makes a frantic push to secure a pact to ensure an orderly withdrawal from the European Union, another threat is emerging for the currency: Britain’s faltering economy.

While a deal would reduce immediate uncertainty, much economic damage is already done and any relief rally in sterling could be limited, according to SEB.

Aberdeen Standard Investments’ Luke Hickmore favors maintaining short positions in the pound for now.

The UK economy grew at the slowest annual pace in six years last quarter, the latest data show, further dimming the outlook for the currency that has slid 12% since the nation voted itself out of the EU in 2016.

Fitch Ratings has put the country on a downgrade warning, saying that a no-deal Brexit or a relationship with the bloc that hurts the economy may result in a rating cut.

“We can already see quite clearly that we have a negative impact on the economy,” said Richard Falkenhall, SEB’s head of trading strategy.

“Even if you get some sort of controlled withdrawal with a deal, the uncertainty will still be there. That’s one reason why we don’t see sterling rallying enormously.”

Aberdeen Standard money manager Hickmore sees a three-month extension to the Brexit deadline as the most likely prospect, and is worried about negative economic signals including the build-up of industrial inventory, particularly in the automotive business.

‘Structural damage’

The pound was on track for a weekly gain Friday amid optimism that next week will herald some form of Brexit progress.

Though the pound may rally further if a Brexit deal is secured, it will probably top out at around US$1.38, according to Hickmore.

While sterling had remained consistently above US$1.40 before the Brexit vote, “there has been some structural damage for the UK economy we need to get over” before the currency returns to such levels, said Hickmore.

ABN Amro Bank has cut its pound forecasts in response to signs of economic weakness and now sees a more cautious advance in the currency on an eventual Brexit deal than it did earlier.

It now sees sterling at US$1.35 by year-end versus US$1.45 previously.

Brexit risk is an increasing drag on the economy, according to ABN.

Analysts at the bank including senior currency strategist Georgette Boele pointed to investment “at a standstill” and services-sector data teetering on the verge of contraction as they downgraded their 2019 growth forecast for the UK to 1.1%.

The downbeat expectations for the economy and interest-rate increases by the Bank of England “combined with prolonged Brexit uncertainty and less US dollar weakness in 2019 means a less bullish outlook for sterling,” said Boele.