Sterling is getting a further boost after British and EU leaders agreed to extend Brexit trade talks beyond Sundays deadline, temporarily staving off the threat of a nodeal scenario. Analysts broadly expect the pound to continue to rally if the U.K. and the EU can hash out a deal in the coming weeks. Barclays projected on Monday that an accord before the end of the year could see sterling break through the 1.35 barrier and continue to grind higher from there.
But while the pound is expected to take a substantial hit in the event of the U.K. leaving the EU orbit on World Trade Organization WTO terms, analysts are not anticipating a global contagion for other financial assets.
Peter Chatwell, head of multiasset strategy at Mizuho told investors in an email bulletin Friday that the threat of a nodeal departure is only a big deal for sterling in the foreign exchange markets and said he didnt buy the narrative around a global ripple effect.
It should mean gilts U.K. sovereign bonds continue to rally strongly, U.K. breakevens rise materially, and ultimately that the BoE Bank of England will probably cut to 0 and increase QE quantitative easing before the February meeting. The door to negative UK rates is well and truly open, Chatwell said.
The Bank of England has been conducting academic research on the impact negative interest rates could have on markets and the economy, having cut rates from 0.75 to 0.1 since the beginning of the coronavirus pandemic and expanded its…