ABN AMRO "Less Bullish" Pound Sterling vs. Euro and Dollar

Above: Georgette Boele, ABN AMRO. File Photo. Image Courtesy of ABN AMRO.

- No deal risk still low, but uncertainty to remain for now

- downgrade UK economic growth forecasts

- no 2019 rate hikes from the BoE

- Softer UK real yields to be "less bullish for sterling"

Financial markets are being tipped to experience "some significant volatility" over coming weeks which could impact negatively on the value of the Pound, suggests a new analysis on the British Pound's outlook from Dutch lender and investment bank ABN AMRO.

Foreign exchange strategists at ABN AMRO have this week told clients they are downgrading their growth forecasts for the UK economy as a result of expectations of further Brexit uncertainty and volatility, which has in turn seen downgrades to UK bond yield values and the Pound.

"Uncertainty about Brexit continues to hang over the market and this has limited the upside in Sterling," says analyst Georgette Boele with ABN AMRO in Amsterdam, "no-deal still unlikely, but the ride could be bumpier." The call by ABN AMRO comes in a week that has seen the Pound subject to further moves triggered by newsflow out of Brussels where EU and UK negotiators continue to work to find a solution to the Irish backstop clause contained in the Brexit deal. Markets have liked what they have heard, however we are cautious that in the current environment bad news could come as a rude surprise to an increasingly complacent market.

The February forecast update on the Pound from ABN AMRO comes after a strong January for the currency which saw it easily outperform its competitors as foreign exchange markets rapidly discounted the prospect of a 'no deal' Brexit transpiring on March 29. Triggering the belief that a 'no deal' was becoming less likely was the defeat of Prime Minister Theresa May's Brexit deal in the UK parliament.

While the passing of a deal is forms a best-case scenario for Sterling's outlook, the defeat of the deal also showed there is a majority in parliament who would look to thwart a 'no deal' outcome. So while a defeat of the deal is a negative, the silver lining is the concrete evidence that a 'no deal' can be avoided.

"One thing remains clear: parliament is against a no deal Brexit, and we are confident it would act to prevent it should that become necessary. We also do not believe PM May would allow no-deal to happen, despite her public refusal to rule it out," says Boele.

That May would look to extend the Brexit process rather than commit to a 'no deal' was hinted at last week after May's senior Brexit negotiator Olly Robins was overheard in a bar in Brussels by a journalist saying May would ultimately offer parliament the choice of a tweaked version of her deal or a very long delay to Brexit.

For Boele a long delay brings with it an accompanying higher risk that Brexit does not happen at all.

ABN AMRO say there is a 45% probability that the Brexit deal, or a variant of the deal is passed before March 29.

A softer Brexit/2nd referendum with Remain outcome is given a 40% weighting.

A 'no deal' Brexit is given a 15% weighting.

"With that said, the closer we get to 29 March without a ratified deal or a Brexit delay, the higher the perceived risk no-deal will be to financial markets, and so there could be some significant volatility over the coming weeks," says Boele.

Cutting Forecasts

While a market-friendly Brexit outcome is the base-case expectation at the Dutch lender, the UK economy is still expected to have seen growth levels shift lower as uncertainty is expected to persist for a few weeks yet.

"Brexit risk is now also an increasing drag on the economy," says Boele. "Investment has come to a standstill over the past six months, and this is likely to continue to weigh on activity at least until any near-term resolution to the current uncertainty."

ABN AMRO's 2019 GDP growth forecast is cut by 0.6pp to 1.1% from 1.7% previously. Consensus amongst the analyst community is for the economy to grow 1.4% with the Bank of England forecasting 1.2% in their most recent Inflation Report.

It is worth noting, ABN AMRO have lowered their Eurozone forecasts in light of slowing global trade, downgrading their 2019 growth
forecast to just 0.8% from 2.1% as recently as last summer.

This in turn explains why the majority of the cut to forecasts for Sterling are against the Dollar, and not the Euro.

The Bank of England is now no longer forecast to raise interest rates in 2019, but they are likely to raise them once in 2020.

"The improvement in UK real yields is not as great as we had expected previously. This, combined with prolonged Brexit uncertainty and less U.S. Dollar weakness in 2019 means a less bullish outlook for Sterling," says Boele.

Revised Forecasts for the Pound

ABN AMRO's new end-2019 forecast for the Pound-Dollar exchange rate is placed at 1.35, down from 1.45 previously. The new end-2020 forecast is at 1.45, down from 1.50 previously.

The bank's new end-2019 Pound-Euro exchange rate is placed at 1.1628, this is actually unchanged on the previous forecast. However, the end-2020 forecast is however raised from 1.15 to 1.1628.

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