Amundi: Sterling Could Fall Below €1 After Brexit Completion

In a note titled Brexit: How the future trade agreement is going to shape financial assets, the analysts said the most likely outcome was an "intermediate relationship" with a free trade in goods but very limited passporting in financial services.

This result, which they assigned a 50% probability to, would cause sterling to fall to around €0.95 against the euro and $1.30 against the US dollar, as the UK's trade surplus in financial services would no longer be there to counterbalance the large trade deficit in goods. Sterling is currently trading at €1.13.

Didier Borowski, head of macroeconomic research at Amundi, said: "Uncertainty will likely increase from H2 and more so in 2019, when it becomes clear that financial services will not be provided to Europe from the UK as before.

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"Drastically restricting financial services passporting could lead to a further deterioration of the current account deficit that would harm the pound."

Borowski warned this scenario, which would meet opposition from "Bremainer Parliament" and business lobbies, would have an impact on both residential and business investment as a result of the increasing uncertainty from a weaker pound.

A weak sterling, he continued, would lead to higher exports and only cause inflation to fall to around 2.6%, far above the Bank of England's 2% target.

The BoE adopted a more hawkish stance at its latest Monetary Policy Committee (MPC) meeting and with inflation surprising to the upside at 3% in February, a May rate hike has become more likely.

"In our opinion, the BoE will still find itself in the difficult position of having to deal with an inflation scenario that we expect to remain above its target throughout 2018, and with a pace of growth in the economy that, although expected to underperform the Eurozone's, does not show severe signs of slowdown.

"Given that rates in the UK are still at very low levels, there could be an incentive to continue normalising as long as the scenario doesn't take the direction of a hard Brexit and growth continues to remain decent."