Pound Poised to end 2018 Higher Against the Euro: ING

© European Union, 2018 / Source: EC - Audiovisual Service / Photo: Lukasz Kobus

The Pound is on course to reverse losses and end the year with a gain over the Euro, according to analysts at ING Group, who argue that a Brexit deal is likely to be struck during coming months and the "risk premium" weighing on Sterling will disappear as a result.

The call will provide some relief to those looking to convert out of Sterling but have over past weeks seen the GBP/EUR exchange rate plump fresh multi-month lows in the 1.10 region.

However, a shift in tone regarding the progress of Brexit negotiations has afforded Sterling the opportunity to recover with traders exiting bets against the currency.

ING's call came alongside statements this week from European Union negotiator Michel Barnier, claiming a deal covering the terms of the UK's withdrawal from the bloc could be reached within weeks. Barnier said last week that Brussels is open to considering alternative "backstop" proposals for how to manage the Northern Irish border if an agreement on the future relationship is not reached within the transition period that is expected to run until the end of 2020. 

Barnier's recent optimism has given Pound Sterling a fresh lease of life at the beginning of September, suggesting investor angst about the trajectory of the negotiations is now easing. The Pound-to-Euro exchange rate has risen 1.3% in the last seven days, whittling its 2018 loss down to just -0.07%.

ING Group forecast that this loss slowly but surely be converted into a year-to-date gain over coming months.

"The price of GBP continues to reflect an enigma of uncertainties: a fragile UK government, uncertainty over the Brexit end-state and economic policy uncertainty. GBP is cheap – but the Brexit chaos in the UK makes it a good reason to trade at a discount," says Viraj Patel, a currency strategist at ING Group. "While UK political uncertainty may keep EUR/GBP supported, we do feel the topside risks of a breakout beyond 0.92 are limited."

Patel says a fall back toward the 1.0869 for the Pound-to-Euro rate would "sufficiently" reflect the risk of a "no deal Brexit" so if Brexit fears were to return in the months ahead, losses would likely be limited.

Meanwhile, Italian politics and the high risk of a destabilising clash between the coalition government and Brussels in the autumn may also command its own risk premium and weigh on the Euro during the months ahead.

"A solution on the Irish border backstop would be the catalyst for a sharp EUR/GBP move down to 0.85-0.87 as no deal Brexit risks are priced out. This is where we think the balance of risks now lie," Patel writes, in ING's third-quarter review of currency markets.

*EU'S BARNIER: GETTING BREXIT DEAL IS `REALISTIC' IN 6-8 WEEKS
Based on my calculations Michel Barnier headlines have accounted for a cumulative +2.75% appreciation in $GBP in recent weeks.
That's right, the pound is currently being supported by a French politician ????#Brexit pic.twitter.com/ClPW2hYQu1

— Viraj Patel (@VPatelFX) September 10, 2018

The so-called "backstop" proposals for trade arrangements should UK and EU officials fail to agree a solution to the Irish border problem remains the most contentious issue in the talks. The current proposal would force the UK to choose between remaining inside the EU single market and customs union until a deal that is palatable to Brussels can be struck, or allowing the Northern Irish province to be annexed into the regulatory and legislative orbit of the EU.

Prime Minister Theresa May has said "no British Prime Minister" could allow Northern Ireland to be annexed, but remaining inside the customs union and single market would be political dynamite for some MPs and many grass roots members of the governing Conservative Party.

With Pound Sterling having moved higher since Barnier's comments this week, markets are seemingly hoping that there is now enough political will on both sides of the Channel for a solution to be found.  

"Sterling remains rather bid after the EU Brexit negotiator Barnier said yesterday that a Brexit deal should be possible within an eight-week timeframe," says John Hardy, chief currency strategist at Saxo Bank. "But as former foreign secretary William Hague points out in an op-ed in the Telegraph, there is a strong risk of a constitutional crisis if a sufficiently large Conservative party revolt of Brexit hardliners who believe a Chequers-like deal provides insufficient sovereignty for the UK requires a large number of Labour MP’s to vote in favour of the deal."

Hardy's summation is that "risks remain" and the Pound may have a hard time sustaining its upward momentum until it becomes clear that Prime Minister Theresa May is able to command enough support from within her own party to enable the government to pass key Brexit legislation without having to turn to the opposition.

ING's Patel acknowledges all of these risks but forecasts that a deal will ultimately be reached, paving the way for Pound Sterling to rise back to 1.1663 in time for year-end. He also projects the exchange rate will rise to 1.1627 before the end of September 2016, although ING's forecasts will likely change to account for new information before then. 

Against the US Dollar, Patel and the ING team forecast Sterling will rise from 1.3026 Tuesday to 1.33 by year-end and 1.49 in time for September 2019.

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