Brexit can-kicking leaves pound's prospects in suspended animation

London

POUND analysts are struggling to find reasons to be optimistic even after the immediate threat of a no-deal Brexit was lifted.

Sterling strengthened last as the United Kingdom and the European Union agreed to extend the divorce deadline to Oct 31, but its gains were well short of what strategists had previously predicted for such a scenario.

The currency's prospects still remain weighed down by the threat of longer-term economic damage from Brexit, along with the heightened domestic political risks.

"My optimism on sterling's rebound even on a deal being signed has lessened," said Jane Foley, head of strategy at Rabobank. "It's the outlook for the UK economy, but also the Brexit process has left in its wake a real mess for UK politics."

Sterling was up 0.5 per cent for the week as of Friday afternoon in London, but remains close to the US$1.31 level it has traded around over the past few weeks.

A survey of strategists last month found they expected the pound to rally to US$1.33 on a Brexit extension. The currency will struggle to lift off from current levels in the next six months, according to strategists at Rabobank and Mizuho Bank Ltd.

While a no-deal outcome has been priced out, investors now see a risk of a snap election or a leadership challenge to Prime Minister Theresa May. She has previously offered to step down if lawmakers backed her Brexit deal.

Talks between Mrs May's Conservative Party and the opposition Labour Party will continue this week even with Parliament in recess, as they aim to find a compromise plan to break the Brexit deadlock.

UK data will be the main market focus otherwise, with inflation and jobs reports set to provide a further insight into the health of the economy. BLOOMBERG