Over the past few years, investors have become accustomed to the fact that the pound is following the Brexit news and turning a blind eye to UK statistics. However, the outbreak of coronavirus has made adjustments.
Due to the pandemic, market participants overlooked information about the resumption of the dialogue between London and Brussels regarding future relations. The parties agreed on the dates of the negotiations, which will be held in the weeks beginning April 20, May 11 and June 1, in the form of a video conference.
The day before, the British authorities extended the national quarantine for another three weeks due to coronavirus pandemic.
"Long-term blocking could lead to a reduction in the UK economy by more than a third this quarter, increasing unemployment by more than 2 million and bringing the budget deficit to the highest level since World War II," warns the National Office of Budget Responsibility (OBR).
"In the coming weeks, the pound will focus on how deep the decline in the British economy due to coronavirus will be and how quickly it can recover. In addition, the risk of a chaotic Brexit returned from the far box again to the table after the United Kingdom rejected the EU proposal to extend the deadline for developing a trade agreement - the end of this year," Rabobank experts said.
In their view, the pound will look vulnerable in the coming months.
"While investors are likely to be encouraged by any reports that the negotiations between London and Brussels regarding future relations are progressing well, they will also remember that the British side can still fulfill the threat of withdrawing from the negotiations without concluding a deal. Given the degree of economic uncertainty surrounding Brexit, we see a risk of the GBP / USD pair falling below 1.20 in a three-month period, although we expect to see the rally of the pair later this year," Rabobank added.
