On Wednesday, the Sterling was slightly weaker, as the euro climbed and traders waited to see if Britain would be able to sign a post-Brexit trade agreement with the European Union during the negotiations this week. In addition, Chancellor Rishi Sunak is also scheduled to present the Spending Review details on Wednesday, which will coincide with the release of the latest projections by the Office of Budget of Responsibility regarding the British economy. Most investors in the market are expecting a trade deal to be clinched, even if it does turn out to be a bare-bones one, with the talks expected to continue till next year.
Meanwhile, from January onwards, EU banks will be required to use platforms within the European Union, as said by the securities watchdog for the bloc on Wednesday. This move could cut off the biggest derivatives trading hub in the world i.e. the City of London. Michael Saunders, the interest-rate setter for the Bank of England, said that Brexit’s long term effects could end up having a bigger impact on companies, as opposed to the COVID-19 pandemic. Some of the economic strength of Britain has already been wiped out by the pandemic, which include the prospects for the Sterling.
On Tuesday, Britain’s finance ministry said that the government would be spending more than 4 billion pounds, which is equal to $5.3 billion, in the next three years for getting job-seekers and the long-term unemployed back to work after the coronavirus pandemic. This financial year, Britain’s economy is on the path of borrowing a staggering 400 billion pounds ($534 billion), as it is struggling due to the economic and social impact of COVID-19, which has taken the lives of more than 55,000 people. According to MUFG, the United Kingdom was likely to be worse off than most of the developed countries because they will have to borrow a lot for fighting the effects of the pandemic.
The deficit for UK was estimated to be 16.5% this year, which makes it the third-worst in the list of advanced countries. According to projections, the deficit will be about 4.4% of the GDP by 2025, which again makes it the third-worst. As the severity of the gross domestic product’s contraction is also expected to be worse than other countries, it is highly likely that the way back to recovery for the region would be a lot longer and more difficult than others. This has prompted a negative outlook for Sterling as a whole.
The pound was last down by 0.1% to reach $1.3345 and had also fallen against a stronger euro by 0.3% to reach 89.24 pence. The option costs for protecting against any sudden moves in the sterling also subsided across all maturities. In fact, the three-month costs were trading at 8.5%, which was a four-month low. There was a bit more elevation in the two-week and one-week option costs, which indicated implied volatility in the British currency.