Pound vs Euro Outlook is Dividing Analysts in Mirror-image of Brexit Impact on Society

- Pound-to-Euro rate outlook is dividing analysts. 
- Some say enough bad news is already in the price.
- Others say it could go lower, eye Brexit technical notices.

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The Pound-to-Euro rate outlook is dividing analysts in an almost-mirror image of how fractured the populace has become over Brexit.

In one camp are those who see the Pound-to-Euro rate as having absorbed a lot of bad news already and, on the other hand, there are those who say the risk of a "no deal Brexit" will put more pressure on the Pound in the months ahead.

"It is difficult to see how the pound can strengthen on a sustained basis without evidence of much needed progress in Brexit negotiations," says Lee Hardman, a strategist at MUFG. "The pound has staged a tentative rebound at the start of this week. There is no clear catalyst for the turnaround in fortunes, which more likely reflects that the pound had become oversold in the near-term."

The more widely held view of the two, however, is that Sterling has already absorbed al lot of bad news and may have reached a bottom from which the only way is up.

However, with the odds of the Bank of England raising rates again before Brexit dwindling, the question of what could help GBP higher, barring a 'deal', is pertinent.

"We are slightly uncomfortable chasing GBP much lower now – especially in the absence of any tangible signs that we’re heading towards a no-deal Brexit," says Viraj Patel, FX Strategist at ING Group. "While the perceived odds of a no-deal are high – this may be partly due to political games and posturing. We still feel the odds of an actual economic regime change (UK reverting to WTO trading rules) is much lower."

Patel says the Pound-to-Dollar rate could fall to 1.27 over coming weeks but that this would likely mark a nadir for Sterling, particularly if an EU withdrawal deal is then agreed before the October or December European Council summits.

Likewise, the Pound-to-Euro rate could fall to 1.0950 but again, this would likely be the extent of its losses so long as an exit from the EU on World Trade Organization terms is avoided.

Above: Pound-to-Euro rate shown at weekly intervals.

Another advocate of this view is Elsa Lignos, global head of currency strategy at RBC Capital Markets, who also says there's a risk that Sterling could now bounce from oversold levels.

"We're getting to a stage where there's actually quite a lot of short term bad news priced in, a lot of pessimism around the potential outcome of the negotiations and there could be some downside there if we see a break of this rising uptrend," says Lignos, of the EUR/GBP rate, in an interview with Bloomberg News.

Above: Euro-to-Pound rate shown at weekly intervals.

Brexit "No Deal" Notices Published

Thursday marks the release of the first of the government's 'technical notices' setting out how companies across certain sectors should deal with a "no-deal Brexit" and what the impact of this on those sectors could be. Some say these could impact on Sterling in the short-term and also influence public opinion.

"On the one hand the government will have to warn in a credible and serious manner about the expected at least short term economic and political turbulence caused by a no deal scenario. This might be a way to gain the backing of the population for a compromise to be reached in the negotiations with the EU," says Esther Maria Reichelt, an analyst at Commerzbank. "The most under-estimated Sterling risk in my view remains the British government lacking the backing for its Brexit path amongst its own populace."

Already some government ministers, alongside various industry incumbents and representatives, have claimed there will be massive tailbacks at all UK ports as customs checks are brought in after a "no deal Brexit".

There have been suggestions that food and medicine supplies, many of which are imported from EU countries, will become scarce because of these customs checks. Some aviation industry incumbents have said airports may be subject to delays as there are no provisions for aviation in the World Trade Organization rules.

The 3 million EU citizens who live in the UK will find themselves in a precarious position all of a sudden and so will the 1 million Brits living in the EU.

Many analysts say Sterling will fall to below parity against the Euro and close to it with the US Dollar, which would lead to another rise in inflation as imported products become more expensive to buy. Others have claimed the economy will go into recession.

Given the choice between a soft Brexit and a no-deal Brexit with the above consequences, the government may be hoping Brexit voters soften their stance, which would make concessions from London and a last-minute deal more likely.

The potentially-extreme negative consequences of a 'no-deal' Brexit should mean the chances of it actually happening are remote. If this is so then those with a more constructive view of the Pound may have a good argument when they say the currency is nearing a 'bad news' floor.

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