Markets are underestimating the possibility that a trade agreement between the U.K. and the EU ends up resembling the much-feared 'no-deal' scenario, some strategists say.
However, State Street Head of Macro Strategy Lee Ferridge told CNBC that the market is underestimating the potential for any trade agreement between the U.K. and the EU to be "not a lot more than WTO rules," therefore almost equivalent to the no-deal scenario.
"I still don't think the market is really factoring in that in theory the no-deal risk is gone, because there is a deal now, but when we were talking about the no-deal Brexit, what people were really talking about was 'what's the trade agreement? What is the future trade relationship?'" Ferridge told CNBC on a phone call Wednesday.
The Bank of England on Thursday forecast anemic U.K. GDP growth of 0.8% in 2020, and Ferridge suggested that with uncertainty over trade keeping investment levels low, any concern over a breakdown in negotiations could send sterling back to the low 1.20s against the dollar. "We're around $1.30 now, we've been down to the low 1.20s before when people were worried about the no-deal Brexit, but if the realization is that really there isn't going to be that much of a free trade agreement - it's going to be less access to the single market than Canada has at the moment - then there's got to be every risk that sterling falls back to those low 1.20s we saw before, particularly if growth stays low.
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