Brexit fears still weighing on sterling despite rally

Having fallen since mid-November, trade-weighted sterling has recovered a little over the past month. But with the pound still far below its previous peak, and demand for protection against further falls in sterling high, there’s little evidence that the Brexit worries which had been putting the pound under pressure have gone away. Partly, reflecting these concerns, markets still expect ultra-loose monetary policy to remain on hold until late 2019. Beyond the immediate aftermath of the referendum, we expect sterling to fall regardless of the outcome, as investors’ attention turns to the size of the UK’s current account deficit. Elsewhere, there’s less clear-cut evidence that Brexit uncertainty is affecting market prices. UK markets have generally moved broadly in line with developments in global markets recently, with equity prices and government bond yields initially rising before slipping back. And corporate bond yields are now at their lowest level for about a year.