British Pound: Analysts Sceptical the Bounce against the Euro Can Last
Image © Pound Sterling Live
- More short-term gains possible for the GBP/EUR exchange rate
- But, gains to ultimately be capped as political hurdles remain
- Eyes on today's Brexit negotiation press conference
The British Pound is, at the time of writing, the best performing major currency of the past week thanks to a bout of relief buying stemming from fading fears that the UK and EU are headed for a 'no deal' Brexit.
A 2.08% advance against Japan's Yen and a 1.73% advance against the Dollar are the stand-out moves.
However, a 1.0% advance against the Euro is notable in that the Pound's performance against the single-currency is instructive as this exchange rate is widely seen to be the best marker for Sterling's performance relating to Brexit sentiment.
"EUR/GBP proved a better gauge of Sterling sentiment being sullied by markets prepping for an outcome in which Britain and Brussels fail to reach a trade deal before Brexit commences in late March. No trade deal would risk subjecting the U.K. economy to growth-sapping uncertainty," says analyst Joe Manimbo with Western Union.
The British Pound surged higher against a host of major currencies mid-week following comments from chief EU Brexit negotiator Michel Barnier that "the EU is preparing to offer a partnership with Britain such has never been with any third country."
Analyst Viraj Patel with ING Bank N.V. describes the comments as "monumental for GBP."
The Pound-to-Euro exchange rate recovered from 11-month lows at 1.0990 to peak at a weekly high at 1.1167 in the wake of further constructive news from France's Emmanuel Macron. Reports suggest the influential European leader will aim to push fellow leaders towards a deal at a summit due to be held in Austria next month.
The developments serve to suggest the market might have been overly pessimistic on the EU and UK's desires to strike a Brexit deal.
Near-Term Gains
Concerning the outlook for Pound Sterling from here, ING's Patel says the Pound could shoot much higher as "no deal Brexit risks get priced out."
He suggests the GBP/USD exchange rate could go as high as 1.31-1.32, which should ensure a firm base is placed under GBP/EUR.
Roberto Mialich, FX Strategist with UniCredit Bank says, "Sterling may remain firm after talks circulated yesterday that the UK and the EU might drop the current deadline for a Brexit deal, which is currently set for 18 October, when the EU summit also takes place."
Mid-November seems now to be the new end-date for divorce talks, giving the two parties more time to reach a deal.
Kathy Lien, Director of BK Asset Management says the EU's willingness to cooperate should be enough to take GBP even higher; "speculators are aggressively short sterling and today's breakout will motivate traders to cover their shorts. We see GBP/USD rising to at least 1.3050 and possibly even 1.32 on short covering flows alone."
Valentin Marinov, Head of G10 FX Strategy at Crédit Agricole says he remains cautiously optimistic on the outcome of the Brexit negotiations and this underpins a moderately bullish longer-term view on GBP against both EUR and USD.
"That said, we would wait for more concrete indications of progress before changing out cautious near-term outlook for the currency," cautions Marinov.
What is striking about the above positive views is that they all cover the short-term.
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Curb Your Enthusiasm
It is certainly notable that all the positive talk coming from analysts concerning the Pound's outlook in the wake of the recent developments pertain to the short-term.
There is certainly an overwhelming sense that that ultimately any gains are likely to prove short-lived in nature.
Following Sterling's jump, Joshua Mahony, Market Analyst at IG, warns that the market could be getting a little too far ahead of itself.
"Unfortunately, while we are seeing some significant improvement in market sentiment after this announcement, there is feeling that we have seen this all before. Almost all the preceding ‘breakthroughs’ have been swiftly proven to be a false dawn, and thus while we are seeing the pound spike higher, there is certain to be some hesitancy until we see a more consistently positive tone from the EU."
The sentiment is shared by a prominent Frankfurt-based foreign exchange analyst.
"The risk of a 'no deal' Brexit... is still being underestimated by the market, as the British government has spent most of the past two years creating obstacles for itself and dealing with its own issues rather than shaping the relationship with the EU following 29th March 2019," argues Antje Praefcke, an analyst with Germany's Commerzbank.
"I find it difficult to imagine that Barnier will suddenly give in, will accept that some of the EU’s “red lines” will be breached and now allow the UK to cherry-pick. But of course I would welcome a surprise," adds Praefcke.
Markets will await further updates on the state of negotiations ahead of the weekend as the two negotiating principles Michel Barnier and Dominic Raab are due to meet to discuss the progress of this week's talks.
We watch for any guidance that might suggest sticking points have been overcome.
.@MichelBarnier will meet @DominicRaab this Friday @EU_Commission to take stock of the #Brexit negotiations. This will be preceded by technical level negotiations on the Withdrawal Agreement and the future relationship: https://t.co/q2O3W5EImX pic.twitter.com/5DzUFsQaQe
— Daniel Ferrie (@DanielFerrie) August 29, 2018
Luca Mezzomo, Head of Macroeconomic Analysis at Italy's Intesa Sanpaolo argues that there is no indication in Barnier’s mid-week announcement that the deal offered by Brussels will reconsider the red lines laid out ever since the beginning of the negotiations, including the four freedoms necessarily required for participation in the single market, as explicitly reasserted by Barnier.
"Specifically, the EU’s chief negotiator spoke of a generous FTA (free trade agreement) and of parallel accords on internal security, defence, and air transport, as already prospected by the European Commission months ago. Therefore, the Pound’s movement is excessive if considered as a reaction to Barnier’s words," says Mezzomo.
Kit Juches at Société Générale in London meanwhile puts the recent price action into perspective saying Sterling is merely "bumping-along-the-bottom as far as the Pound is concerned."
"We have yet to see what Barnier's offer of 'a partnership like there has never been before with any other third country' entails, but it is doubtful that it will quickly end the impasse over Brexit," cautions Juckes.
Another point being pushed by foreign exchange analysts is that the Pound's rebound owes a lot to technicalities; specifically the market correcting itself from being overly bearish on the Pound.
"Sterling finally rebounded after comments from EU’s Barnier as he said that the EU wants to keep a close, special relationship with the UK. The market saw the quotes as a sign of a more reconciliatory attitude from the EU. We are not convinced," says Piet Lammens, a foreign exchange strategist with KBC Markets in Brussels. "The move was probably in the first place a short-squeeze on recent substantial sterling losses. Whatever, the correction was quite impressive and deserves monitoring."
Lammens therefore sees much of the recent price action as being a 'short covering' phenomenon where traders are forced out of a very popular bet by an unexpected counter-trend move.
We know these moves offer short-term respite at best, before the overarching trend resumes.
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