This Is How the Pound’s Future Looks From Germany
Open a German newspaper, and it’s hard to see anything other than more losses for the British pound.
The German press is bemused by the whole Brexit situation. You won't often find coverage on page 1. The stories that do surface are laced with a sense of regret at the U.K. leaving--but also a dogged determination to protect the integrity and smooth functioning of the single market as the first priority. The EU stance is portrayed as practical and calculated.
Euro-area governments have come together to map out a robust response to the post-Brexit reality, and forecasts for euro-area economies are buoyant. By comparison, the British political response seems chaotic and economic growth prospects are inferior. It’s easy to see why the view from Berlin, Paris and other parts of the euro area is bullish on the single currency and bearish the pound. Currency valuations are often a proxy for the strength and stability of the domestic economy.
German businesses have been quite consistent since the referendum that the internal EU market is what really matters. Industry in Europe’s biggest economy is willing to back a tough EU stance against the U.K. getting a special deal. This is entirely consistent with Michel Barnier’s recent statements on any future trade arrangements, and the EU’s view that a Canada-style trade deal is the only suitable agreement compatible with British red lines.
Which is in pretty stark contrast to the brouhaha in the British press, with front pages talking of traitors and mutineers. And that turmoil is matched by wider divisions within the U.K. government and Conservative Party.
This conflicted posture is not playing well with U.K. businesses, which are desperately seeking assurances from the government about post-Brexit trade arrangements. Uncertainty is something U.K. industry is looking to minimize, and thus far there has been limited progress on this front.
Not everybody is convinced that the pound will suffer versus the euro. Median forecasts from a Bloomberg survey of analysts show the euro/pound exchange rate at 0.89 this time next year—not too far from where it is now.
In the end, the EU knows what it wants from the negotiations and has established a clear set of parameters for achieving it. It’s a much more emotive debate for the Brits. Currency markets will reward the former approach, and punish the latter.
Richard Jones is a currency markets analyst for Bloomberg News.