Update: Pound-to-Euro Exchange Rate Forecast Upgraded 2% by J.P. Morgan

Above: The Chase Tower, New York © Kristen Cavanaugh, Flickr, reproduced under CC licensing.

- Sterling upgraded for second consecutive month

- Analysts assume a negotiated Brexit

- +10% decline in Sterling likely on 'no deal' outcome

Wall Street investment bank J.P. Morgan have upgraded their forecast targets for the Pound-to-Euro exchange rate for the second consecutive month, eyeing a further reduction in Brexit risks.

While analysts at the world's largest investment bank say the outcome of the this week's E.U. Council summit regarding Brexit talks is important, it is not necessarily critical to the upgrade.

"The central scenario envisages further upside for GBP of a couple of percent on the delivery of a negotiated Brexit by 1Q19," says Paul Meggyesi, foreign exchange strategist with J.P. Morgan in London. "We are upgrading our near-term GBP forecasts by around 2% to bring them closer into line with the central scenario of a negotiated Brexit."

The call by J.P. Morgan comes in an instrumental week for Sterling that sees a crunch meeting of E.U. leaders that was originally set as the deadline for a deal between the E.U. and U.K. to be reached.

However, recent headlines suggest this week's summit starting on October 17 will fail to deliver the planned breakthrough and we have seen the GBP/EUR exchange rate pare recent gains back towards the 1.1350s with U.K. Prime Minister Theresa May briefing parliament that while the two sides are close to agreement some key sticking points pertaining to the Irish border backstop remain.

Nevertheless, May says the divide between the two sides as being surmountable; something the market apparently agrees as Sterling's losses to the disappointing news that no deal would come from the October summit are relatively muted.

The British Pound has risen over recent weeks from an August low in GBP/EUR at 1.0991 to an October high at 1.1463. The gains come in response to growing expectations amongst investors that a Brexit deal would be achieved before the end of the year.

The improvement lead J.P. Morgan to deliver an initial 1-2% upgrade to their GBP/EUR forecast.

While an October breakthrough in talks is unlikely, a breakthrough before year-end is widely seen as possible and it is on this basis that J.P. Morgan announce a second consecutive upgrade.

Political commentators are expecting a November deadline to be announced at this week's European Council summit, with a fall-back and final deadline being possible in December.

There is therefore time.

J.P. Morgan see a 60:20:20 probability for a deal, no-deal and no-Brexit outcome.

A negotiated Brexit would preclude the economic chaos and potential 10%+ GBP crash that would accompany a no-deal Brexit according to J.P. Morgan.

"Reduced Brexit tail risks" has Meggyesi announcing a "second consecutive month of 1-2% upgrade over the forecast horizon vs. EUR".

"However, British Pound upside is expected to be tempered due to a contentious ratification process in the UK once an agreement in reached with the E.U." adds Meggyesi.

So while there is something for Sterling bulls to chew on in this J.P. Morgan assessment, the recovery out of Sterling's post-referendum depths remains a slow burning process with further hurdles lying ahead.  

From a strategic point-of-view, J.P. Morgan are natural Sterling, and are forecast the Euro-to-Pound exchange rate to end the third quarter of 2019 at 0.86, down from a previous forecast of 0.87.

This gives an equivalent Pound-to-Euro exchange rate of 1.1628, up from 1.15 previously.

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