Sterling volatility is the highest it’s been since the referendum. But even if Brexit is delayed, the fact that the UK and EU have managed to chart a path towards agreement should be positive for the currency. Sterling has already bounced on the possibility of a deal and remains off its previous lows against the dollar. This is because the chances of Boris Johnson winning a forthcoming election - campaigning on the strength of his deal - have risen, while those of Jeremy Corbyn have receded. 

Potential tailwinds for UK economy

Once the Brexit cloud starts to lift, the fundamentals of the UK economy should attract more attention. One example is the jobs market where UK labour force participation is at its highest level in 60 years. This may reflect more part-time work and older people working for longer, but it stands in contrast to the US where the same metric is barely back at pre-financial crisis levels.

If investment that had been put on hold due to Brexit suddenly starts to come through and consumer confidence improves, economic growth could surge, leading to an even greater willingness to commit capital. Meanwhile, wages are improving and mortgage rates remain low. Against a backdrop of slower global growth elsewhere, the UK could look attractive in relative terms.

Bank of England may cut rates eventually as risks remain

If the UK economic outlook brightens, the Bank of England may initially become more hawkish. But global risks from trade conflicts and slower growth remain, meaning the Bank of England may ultimately have to fall in line with other central banks and lower rates. Gilt yields therefore have the potential to go lower over the medium term. That said, the need for an urgent rate cut in the wake of a no-deal Brexit looks more remote. 

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