Pound may drop a further 10 percent

The British pound found some much needed relief in yesterday’s trading session after a surprise jump in retail sales figures showed that despite the uncertainties surrounding Brexit, British consumers are still opening their wallets which is a good sign for the economy.

Positive figures like these leads to the belief that the UK economy will avoid a recession later in the year which is 2 consecutive quarters of negative growth and this may provide some temporary support for the pound.

"The rise in retail sales in July was encouraging and supports our view that the economy has picked up in Q3 after contracting by 0.2 percent in Q2," says Gabriella Dickens at Capital Economics.

"Of course, the retail sector only makes up about 30% of total household spending. But spending growth off the high street appears to have remained fairly steady. So July’s figures leave us more confident that the economy avoided another contraction in Q3." She added.

Some analysts however say that any economic data whether positive or negative will be overshadowed by the current Brexit debacle and as the deadline of October 31st nears the odds of a no deal Brexit will grow.

The Market is currently not convinced that a No deal Brexit is the likely scenario but as time goes on and this option begins to become main stream, the pound may continue its downtrend and further losses of up to 10 percent are not out of the question

"Heightened Brexit uncertainty and the ongoing slowdown in global growth have increased downside risks for the UK economy heading into the second half of this year. We now believe that a No Deal Brexit is more likely than not, and it could tip the UK economy into recession," says Derek Halpenny, Head of Research at MUFG.

"The UK has set to conditions for negotiations – to agree to reopen the Withdrawal Agreement for re-negotiation and to scrap the backstop. European leaders have consistently stated that the Withdrawal Agreement and the backstop in it cannot now be changed. We are heading for a major showdown that will likely involve some degree of constitutional crisis, financial volatility and probably a general election," he added.


Analyst

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