A Sideways Grind: Pound / Euro Exchange Rate to get Stuck at Current Levels for three Months show Rabobank Forecasts

Above: File photograph of Jane Foley, Rabobank. Image © Pound Sterling Live, Still Courtesy of Bloomberg News

Foreign exchange analyst Jane Foley at Rabobank has warned the Pound-to-Euro exchange rate could be vulnerable to a sideways grind over the next three months, a move that will frustrate those looking for material changes in value of either Sterling or the Euro.

However, a surprise 'no deal' Brexit would inject a significant amount of movement into the exchange rate that could potentially see the Pound fall and par the Euro in value.

The Pound has recovered over recent weeks as the prospect of a 'no deal' diminished after it became clear that the UK Parliament had found a means to prevent a 'no deal' Brexit from taking place on October 31, with GBP/EUR moving from the 1.07 region back above 1.11. This now puts the exchange rate back within a range it has shown to be comfortable with for much of the period since the 2016 EU referendum.

Foley's central expectation is this Sterling will get stuck in this region once more, as another Brexit delay sees the UK enter another extension period that offers foreign exchange traders and investors little fresh information as to how Brexit will ultimately resolve.

In short, paralysing uncertainty could potentially await.

"PM Johnson is due to meet his Irish counterpart Varadkar later this week and this should provide more clues as to whether the chances of a Brexit deal before the end of this month are dead in a ditch or not. It is our central view that Brexit will be delayed beyond October 31, but since a delay is not a solution we see risk that EUR/GBP will be trading close to current levels on a 3 month view," says Foley in a recent note to clients.

The tone over Brexit between the EU and UK has deteriorated markedly this week, with a Downing Street source telling a UK magazine that they believe the prospect of the two sides reaching a new deal is nigh on impossible.

The suggestion was only given fresh legs following a phone call between Prime Minister Boris Johnson and Angela Merkel, where it was alleged Merkel said a deal was not possible unless Northern Ireland was left within the EU's customs union on an indefinite basis.

The contents of the call have not been officially denied or confirmed, but Sterling inter-day volatility has risen markedly as a result.

Tensions are rising as both sides jockey for position ahead of the key October 17 and 18 European Council summit, where it will be made known whether a new Brexit deal can be agreed.

October 19 sees Parliament sit on a Saturday for the first time since the Falklands war to hear a statement from the Prime Minister. If he has secured a new deal with the EU at the summit we would expect Parliament to vote on it at this point.

Foley says a Brexit deal being passed could see the exchange rate rally back up to the 1.1760 area, with a bias to extend gains.

If the EU and UK are unable to reach agreement, expect political intrigue to ramp up a gear: how does Johnson deliver on his promise to deliver a Brexit "come what may" on October 31?

There remains an outside risk that he finds a mechanism to deliver a 'no deal' Brexit, and this will have profound implications for Sterling.

Rabobank forecasts show the Pound could fall to record lows and ultimately equal the Euro in value on such an outcome.

However, the base-case expectation is that ultimately the UK asks for an extension, in line with the Benn Act, which requires the Prime Minister to request a delay in the event of Parliament failing to either vote for a deal, or for a 'no deal'.

ING are forecasting the Pound-Euro exchange rate to trade at 1.11 in three months out as a result.

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