Pound Sterling Can Strengthen Against the Euro from here: Danske Bank Forecasters

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- GBP/EUR @ 1.1337 -0.02%

- Political uncertainty is now supportive of Sterling

- Danske see potential for GBP/EUR @ 1.16 by year-end

Currency strategists at Danske Bank have told clients they see the potential for Pound Sterling to recover from current levels, saying that the abundance of uncertainty in the UK political landscape is simply no longer a justification to expect further declines.

In fact, for further declines in Sterling we need some clarity on the outlook - the kind of negative certainty that justifies substantially lower levels.

The general rule-of-thumb for Sterling since the June 2016 EU referendum has been increasing uncertainty = a lower Pound.

The call therefore pits Danske Bank's analyst team against the consensus narrative on Sterling which is devoutly dour.

Arne Lohmann Rasmussen, Head of Fixed Income Research at Danske Bank, says "we need clarity if the Pound is to weaken further, not uncertainty, and the former is not coming near term."

Rasmussen says the British Pound "is starting to have a bit of a more stable track record," which is in line with Danske Bank's broader expectations.

"Headlines tend to still be negative but the marginal impact has seemingly hit zero," adds the analyst.

The Pound's fall against the Euro, Dollar and major currencies over the course of May attracted mainstream headlines, but the assumption the currency is in free-fall would be a mistaken one.

Indeed, looking at the Pound's 2019 performance, the Pound-to-Euro exchange rate is still 2.0% higher, while the Pound-to-Dollar exchange rate is now a percent lower than where it opened the year.

Others agree that uncertainty is not necessarily an assured ticket to further losses at this juncture.

"I think the Pound is about to enter the well-deserved summer break as the currency has become accustomed to numerous imponderables. As long as it's undecided who will succeed Theresa May, no substantial changes of direction are to be expected," says Marc-André Fongern, Head of Research at MAF Global Forex.

Above: Putting the current GBP/EUR levels into context

By taking a step back and looking at the medium-term performance of the currency, i.e. the past 5 months, we can see the major Sterling-based exchange rates are relatively rangebound.

Above: A broader overview of GBP/USD

Rasmussen says the potential for gains from here cannot be discounted.

"Markets too can sometimes be hit by fatigue and we think the trend is for consolidation or even strengthening of the Pound, as we have a more constructive view on the political reality," says Rasmussen. "May might be stepping down but we need clarity if the pound is to weaken further, not uncertainty, and the former is not coming near term."

Danske Bank forecast the Pound-to-Euro exchange rate to trade at 1.16 in three months, six months and 12 months.

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