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Why the pound's rally could hit a roadblock in 1Q 2020

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The pound is set for a yearly gain against the dollar, but it may struggle to take off further in the first quarter of 2020.

London

THE pound is set for a yearly gain against the dollar, but it may struggle to take off further in the first quarter of 2020.

Sterling has recovered almost 10 per cent since hitting an almost three-year low in September, after Prime Minister Boris Johnson's snap election in December lifted political deadlock in Westminster.

The re-elected government's solid majority should help him push through his existing Brexit deal and begin the next phase of talks. But the start of 2020 could see the return of political uncertainty, according to Danske Bank A/S.

"We are going to be range trading going into 2020 until the negotiations with the European Union about trade deals, etc get started, so we need some fresh information either on the performance of the UK economy or negotiations with EU," said Jens Peter Sorensen, chief analyst at Danske. "I doubt that the pound will strengthen significantly in the short term given there is plenty of uncertainty regarding the negotiations with the EU."

The UK currency has fluctuated with political headlines throughout the Brexit process and Mr Johnson's pledge to "get Brexit done" means it likely won't get respite for long. The currency is set to strengthen one per cent to US$1.32 in the first quarter, according to a Bloomberg survey.

The economy could also weigh on sentiment. The Bank of England has slashed its expectations for growth to just 0.1 per cent for the fourth quarter and policy-makers Michael Saunders and Jonathan Haskel continued to push for an immediate rate cut at the central bank's December meeting. The next test will come in the week of Jan 6, with growth figures and industrial production data due.

"UK GDP saw no growth between August and October, and we expect that dry spell to continue with another zero per cent reading in November," wrote HSBC analysts including James Pomeroy in a research note. "We also expect another fall in manufacturing output. We forecast zero growth for the fourth quarter as a whole." BLOOMBERG