Pound Sterling to Receive a "Small Bump" in Q4: Barclays

Image © Pound Sterling Live

- Brexit deal still likely despite 'space between parties'

- Extension of deadline a strong possibility via transition period

- Pound will underperform later in 2019 as economy flatlines

September saw Pound Sterling advance 0.50% against the Euro and 0.54% against the U.S. Dollar amidst easing Brexit fears and data that points to an economy that continues to expend.

Ahead of the final quarter we hear from one of the U.K.'s leading high-street names that Sterling could receive a small boost that will allow it to end the year higher against the Euro and U.S. Dollar.

According to Barclays, the British Pound is likely to experience a "small bump" after a Brexit agreement, followed by a gentle unwind on disappointment at the shallow path for interest rates by the Bank of England.

The recent Salzburg summit of European leaders suggest to markets the U.K. and E.U. have significant work to do in order to seal the Withdrawal Agreement, but Barclays are expecting a deal of some sort to be agreed.

Interestingly, analysts believe the Article 50 deadline might be extended and with more time both sides should be able to reach a compromise.

"Although we are under no illusion that the divide between parties on a deal is anything less than vast, the ambiguity around the eventual form of an exit under A50 is also large, leading us to be confident that an exit with a transition agreement will be achieved," says Nikolaos Sgouropoulos, FX analyst at Barclays.  

This should give the Pound an end-of-year boost versus both the Dollar and the Euro.

EUR/GBP is expected to fall to 0.87 (this means the Pound-to-Euro exchange rate going up to 1.1496) by the end of the year and GBP/USD to 1.32.

The Pound-to-Euro exchange rate is currently quoted at 1.1243, and the Pound-to-Dollar at 1.3062.

Advertisement
Lock in Sterling's current levels ahead of potential declines: Get up to 5% more foreign exchange for international payments by using a specialist provider to get closer to the real market rate and avoid the gaping spreads charged by your bank when providing currency. Learn more here

2019 Could be a Struggle

U.K. economic data has been relatively strong of late, with retail sales beating soft estimates in August and wages growing faster than economists had expected, but Barclays is still not particularly optimistic on the economic outlook and they see this as a drag for the Pound in 2019.

"Our reading of the economy is that it continues to slow and is unlikely to support further rate hikes," says Sgouropoulos of the all-important path for Bank of England interest rates.

Central bank's raising interest rates drives currency appreciation by attracting more foreign deposits due to the higher rates of interest on offer, yet the Bank of England will not be able to raise interest rates at a fast pace because of slower-than-expected growth.

A 'withdrawn' approach by the Bank of England, therefore, is likely to be the primary driver of the second part of Barclay's forecast which sees Sterling slide back down in 2019; falling to 0.88 versus the Euro (1.1363 GBP/EUR) during quarters 1-3, and 1.31 versus the Dollar in quarters 1-2 before recovering to 1.32 in the third quarter.

"We now expect a small bump in GBP following an agreement on exit, but for it to be unwound once disappointment over the path of the BoE materializes," concludes Sgouropoulos.

Despite its up-and-down forecast, the Pound is more likely to outperform the Euro than then Dollar judging from Barclay's analysis of the other two currencies, even if this is not reflected in the forecasts.

The Euro is expected to lag the Dollar as the European Central Bank (ECB) delays its plans to raise interest rates - much like the U.K. due to sullen growth.

Barlcays have revised their USD forecasts higher since their June report, however, as they expect the Federal Reserve (Fed) to remain on track to hike interest rates several times in 2019.

Previously, Barclays expected a greater degree of "convergence" between the US and the 'rest of the world' (RoW) both in terms of economic growth and interest rates but, if anything, the exact opposite has happened. The expected 'spillover' of US growth abroad has not happened nor is it likely to over the forecast horizon. The Dollar is likely, therefore, to outperform RoW and rise, at least until Q3 2019 when it "resumes the downtrend started in 2017," says Marvin Barth, FX strategist at Barclays.

Sterling Stronger Ahead of Fourth Quarter

Pound Sterling enjoyed a 0.80% gain on the Euro in the final week of September amidst a lull in negative Brexit headlines and increased scrutiny on Eurozone political risks and data.

The Euro struggled ahead of the weekend amidst growing doubts Italy’s coalition government would manage to agree on a 2019 budget target; the angst saw a broad-based decline in the Euro exchange rate complex.

Further woes were heaped on the single currency after Eurozone inflation data disappointed against market expectations and suggests

At one stage the sell-off in the Euro allowed the Pound-to-Euro exchange rate to peak at 1.1257, levels last seen one week previously just before the Pound suffered a 1.0%+ slump on Prime Minister Theresa May's comments that Brexit negotiations had reached an impasse.

Italy’s government ultimately agreed late Thursday to set the 2019 budget deficit target at 2.4% of GDP and while this doesn't breach E.U. rules, markets and analysts alike are distinctly unimpressed by the outcome and eye a bloating of the country's already substantial debt pile.

The final target set by the coalition government was larger than that being promoted by Italy's technocratic finance minister Giovanni Tria who was aiming for a 2.0% target. There were concerns that the at times tense negotiations would see Tria resign, which in itself would have been a major red light for markets.

However, the 2.4% agreed by the coalition government ultimately remains within the 3.0% budget deficit target imposed by the E.U.’s Stability and Growth Pact.

There were fears that a breach of the E.U. rules would set Rome up for confrontation with Brussels which would ultimately raise political uncertainty in the bloc and hurt the Euro.

Markets have expressed some relief that confrontation has been avoided and the Italian-German 10-year government bond yield spread remains contained within its recent ranges.

"This suggests investor concern over Italian fiscal profligacy is muted. Consequently, we expect EUR to recover some of its recent losses," says Elias Haddad, Senior Currency Strategist with Commonwealth Bank of Australia.

Advertisement
Lock in Sterling's current levels ahead of potential declines: Get up to 5% more foreign exchange for international payments by using a specialist provider to get closer to the real market rate and avoid the gaping spreads charged by your bank when providing currency. Learn more here