Sterling’s swings leave more downside than upside

The recent swings in sterling triggered by shifts in sentiment towards the chances of a Brexit deal have left little room for the pound to appreciate if there’s a deal, but plenty of room for it to depreciate if there’s a no deal. As the markets appear to have largely priced in a Brexit deal, such a result by 31^st December 2020 would be unlikely to push the pound much above the current levels of $1.35 and €1.13. But as a no deal would come as something of a shock to the markets, there is more scope for it to fall sharply. The weakening in the US dollar in recent months suggests that if there is a “cooperative” no deal, the pound may not fall quite as far as our forecast of $1.15.  But at this stage, the risks are firmly tilted towards the downside.