Sterling to make solid gains this year if Brexit path smooth: Reuters poll

FILE PHOTO: British five pound banknotes are seen in this picture illustration
FILE PHOTO: British five pound banknotes are seen in this picture illustration taken November 14, 2017. REUTERS/ Benoit Tessier/Illustration

January 10, 2019

By Jonathan Cable

LONDON (Reuters) – Sterling is likely to gain more than 8 percent this year — assuming Britain and the European Union part ways amicably, according to a Reuters poll of foreign exchange strategists.

The pound <GBP=> has largely been ignoring economic data, instead swinging wildly on any snippet of news about Britain’s departure from the EU in less than three months.

While it has showed some strength to start the year, that is largely down to dollar weakness. Its performance against the euro <EURGBP=> has been more muted.

With only a short time left, the Brexit outcome remains uncertain. British lawmakers are expected to vote next week against a Brexit agreement Prime Minister Theresa May struck with the EU in November.

May’s government suffered a defeat in parliament on Tuesday when lawmakers who oppose leaving the EU without an accord won a vote creating a new obstacle to a no-deal Brexit.

On Wednesday, May failed to win over the Northern Irish party which props up her government and then lost a vote which means she has a shorter period of time to come up with an alternative plan if she is beaten next week.

A November Reuters poll said sterling would rise around 5.5 percent in the event of an amicable split but fall over 6 percent if there is a hard Brexit.

Still, there is only a median 25 percent probability of a disorderly Brexit, a Reuters poll predicted last month. Almost 90 percent of economists surveyed expect a free-trade deal between the two sides. [ECILT/GB]

Those economists also mostly expect the Bank of England to raise interest rates by 25 basis points to 1.0 percent as soon as April, which would support the currency.

Ongoing doubts about the health of the world’s two biggest economies – the U.S. and China – as well as a trade war between them that’s hurting growth have raised questions about how high U.S. interest rates will go this year.

The dollar’s rally is largely over, according to about two-thirds of the currency strategists polled by Reuters. They said dialling back rate hike expectations has diminished the dollar’s strength. [EUR/POLL]

On Wednesday, the pound rose toward $1.28 after reports May was attempting to win over the Northern Irish Democratic Unionist Party in next week’s crucial vote but dropped when she failed.

Sterling also rallied on Tuesday following reports British and European officials were discussing the possibility of extending the formal exit process amid fears a Brexit deal will not be approved by March 29.

In a month, sterling will be little moved from Wednesday’s levels, trading at $1.27. When Britain and the EU part ways it will have strengthened to $1.30. By mid-year it will have climbed to $1.32 and at year-end it will be over 8 percent higher at $1.38.

“Ultimately, we assume the removal of the current Brexit uncertainty, which will prompt a period of pound appreciation as the year unfolds,” noted analysts at MUFG, who expect a sterling rally to $1.43 by year end.

However, that 12-month median forecast is still lower than the $1.50 sterling was hovering around before the June 2016 Brexit referendum. Only three of 66 analysts with 12-month forecasts expected it to strengthen past that.

Highlighting the uncertainty around the pound’s future, the 12-month forecast ranged from $1.22 to $1.59.

Against the euro, the pound will make modest gains. On Wednesday, a euro was worth about 90.0 pence. In six months, forecasts are for 87.0p and in a year 86.5p.

(Polling by Indradip Ghosh and Sarmista Sen, editing by Larry King)

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