(Bloomberg Opinion) -- Once British lawmakers finally decide what kind of Brexit they want, the pound surely ought to break out of the tight range in which it has traded against the euro since Britain voted to leave the European Union.
Just don't expect too sharp a collapse if it really comes to a messy, no-deal Brexit. It helps that the pound is already cheap on a relative basis. The rest of the world economy has weakened since the vote, and that should help to cushion sterling's fall.
Friday's EU purchasing managers' surveys illustrate how the euro-area economy has significantly softened in recent months, with Germany and France’s manufacturing industries continuing to deteriorate. The U.S. economy remains stronger than most of the rest of the world, but its relative out-performance has significantly tempered – and that is the important comparative factor.
Though the U.K. has also seen growth slow down, it has held up better than many feared. It is also a help that the public finances are in much better shape, as outlined in Chancellor of the Exchequer Philip Hammond’s spring statement last week. Tax receipts were stronger than expected, and the deficit is expected to be 26.6 billion pounds ($35 billion) below the government’s target.
None of this is to downplay the fallout from a messy Brexit. It’s simply that currency pairs are the value of one currency expressed in terms of the other. They are, in other words, a relative game.
The Federal Reserve has signaled it won’t hike interest rates this year and has put its quantitative tightening plans on ice for now. The European Central Bank looks to have made a policy error by ending its QE bond-buying program at the end of last year.
For sterling, the Bank of England now looks to be a potential supporting factor. Policy makers have made little secret of their desire to raise rates following a smooth Brexit – and have done so twice since the 2016 referendum. At Thursday's Monetary Policy Committee meeting, the central bank reiterated that rates could either rise or fall.
Bloomberg Economics expects a mid-year rate hike in the event of a Brexit deal or a long extension. In those circumstances, sterling might be expected to rally sharply – but that optimism ought to be tempered by the recent dovishness of the rest of the world’s central banks.
Certainly, the BOE is most unlikely to repeat its knee-jerk reaction after the referendum of cutting rates and providing stimulus. It has since struggled to unwind its over-generosity.
A lot has changed in British politics in the 30 months since the vote, but the same goes for the global economy. The pound’s performance in coming weeks will be more about the latter than the Brexit battle raging in Westminster.
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Marcus Ashworth is a Bloomberg Opinion columnist covering European markets. He spent three decades in the banking industry, most recently as chief markets strategist at Haitong Securities in London.
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