Sterling could decline further against the euro to offset the economic impact of losing trade links with the European Union, the president of the Peterson Institute told CNBC on Tuesday.
"The pound has moved a lot against the dollar, less than half as much against the . But U.K. trade remains as twice as much with the euro area as it does with the ," Adam Posen, president of the Peterson Institute for International Economics noted.
"If you want to cope with the terms of trade shock, Brexit is whatever other fantasies you have, it's a negative trade shock vis-à-vis the EU and if you want to close some of these trade deficits, the pound has to decline more against the euro," the former member of the Bank of England said.
On the eve of the U.K. government beginning the official process of leaving the European Union, sterling moved slightly higher against the dollar to trade at $1.2557 – mainly driven by a weaker dollar. The euro moved to 0.8642 pence on Tuesday morning.
Most traders are betting sterling will decline in the coming months as Brexit negotiations take place. Both Bank of America Merrill Lynch and Nomura have recently said they are short on the currency. This is because there are several unresolved issues regarding the exit process, raising the chances that the U.K. might leave the EU without any agreement.
"It's going to be painful," Posen said about Brexit. He added however that "it's arthritis, not death."
According to a Reuters poll, most traders expect sterling at $1.23 in one month and at $1.21 in three months.
One of the main controversies ahead of the Brexit negotiations is the exit bill. The European Commission, which negotiates on behalf of the other European countries, has said that the U.K. will have to pay about 60 billion euros before leaving the EU.
But the British government has dismissed the bill, which would be used to pay for the commitments that the U.K. has already made as a member, including supporting agricultural projects across the country.
On Monday, the U.K.'s chief negotiator David Davis told the BBC that Britain would abide by its obligations and settle all the outstanding obligations. However, he said he doesn't agree with the EU figures.
Davis added that the U.K. will have an immigration system that is "sustainable" and allows the number of people entering the country for work to rise and fall depending on the country's needs. He also said that the government has a "huge contingency plan" in the case they are unable to reach a deal with the EU within a two-year deadline. However, he has previously stated that there's no economic impact assessment for such scenario.
Prime Minister Theresa May is due to speak in Parliament on Wednesday and submit a letter to the European Council shortly after, officially kicking off Brexit negotiations.