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Pound Steady; Increasingly Seen not Gaining from Brexit Deal

Sterling was neutral on Tuesday and analysts believe that it won’t change by much even if Britain and the European Union clinch a Brexit trade deal.

“We are becoming increasingly confident that the lift the pound would derive from a Brexit deal being confirmed is likely to be modest,” said Derek Halpenny, head of research at MUFG.

“Yesterday was a good example of some good news failing to provide much lift at all for sterling,” Halpenny said.

On Monday, the EU’s chief negotiator, Michel Barnier, said he would be in London until Wednesday to negotiate a deal, after which talks will switch to Brussels.

Sterling rose only slightly against the euro, however, and fell versus the U.S. dollar. On Tuesday, the British pound was flat against both currencies at 90.70 pence and $1.3021 respectively.

Apart from Brexit, Britain is grappling with a weak economy battered by the coronavirus. Negative interest rates have not been ruled out, another hurdle the currency can ill afford.

Two-year and five-year British government bond yields were in negative territory on Tuesday.

All that creates a discouraging outlook for sterling, Halpenny said.

“We have no example of negative rates in a country running a current account deficit, a budget deficit that is larger than most other major advanced economies and where inflation is by no means low,” he said. “It certainly points to potential for a greater currency impact.”

Reporting by Olga Cotaga

Source: Reuters

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