ING "Worried" About Pound Sterling

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- Next PM is likely to be Brexiteer

- Odds of Johnson winning rise

- Pound could weaken on hard Brexit fears

The Pound can go lower says ING Bank, eyeing the Conservative Party leadership contest yielding a leader willing to enter a 'hard' Brexit and slowing economic growth.

“We remain worried about Sterling. We expect Sterling to remain under pressure ... as the upcoming Conservative Party leadership battle weighs on the currency,” says Petr Krpata, chief EMEA FX and IR strategist, at ING.

The call by ING come as Sterling finds itself caught in a downward move amidst ongoing market repositioning in anticipation of a potential 'no deal' Brexit on October 31: The Pound-to-Euro exchange rate is now at 1.1268, the Pound-to-Dollar exchange rate is now at 1.2696.

One month ago the pairs were at 1.17 and 1.31 respectively.

Boris Johnson is now seen as a clear favourite to become the next PM, and therefore markets will be paying closer attention to his policy stance. Johnson this week said he would execute a Brexit at all costs on October 31, regardless of whether there was a deal in place or not. He has also said he is against a second referendum or a general election.

Odds of Johnson becoming the next Prime Minister have lifted from around 40% to ‘evens’ (50%) in recent days, according to Oddschecker, after Johnson’s campaign team published a video showing how he has a proven track-record of winning across voters who would not normally vote Conservative.

This comes at a time when the Conservative Party’s popularity hits a new low with pollsters amidst signs former voters are turning to parties offering a clear-cut stance on Brexit by either advocating taking the UK out of the EU with no deal (Brexit Party) or advocating a second referendum (Liberal Democrats).

The former Mayor of London and Foreign Secretary does however favour reopening negotiations with the EU to try and remove the Northern Irish backstop.

But, it's not just Brexit that will be bugging the Pound.

Sterling is likely to be challenged on many fronts, however, not just political. The continued uncertainty surrounding Brexit will weigh on “domestic activity” which will translate into slower economic growth, says ING.

There may already be signs that ING is right: Manufacturing PMI survey activity data showed a sharp fall into contractionary territory, only this week.

It was the first time the PMI had showed Manufacturing activity contract since 2016. Activity slumped to 49.4 in May when markets had been expecting a 52.0 result, from 53.1 previously in April. Any result below 50 is a sign of contraction.

Construction PMI followed suit with a surprising drop to 48.6 from 50.5 when no-change had been forecast.

Sector PMIs are considered a reliable leading indicator for broader economic growth, and although Services PMI rose surprisingly to 51.0 in the same period, and makes a larger contribution to the economy, the slump in Manufacturing and Construction do not bode well for the economy.

The expected slowdown in the economy is likely to reduce any expectations of interest rates rising in 2019, says Krpata, and this will also weigh on the Pound since lower interest rates tend to attract and keep fewer inflows of foreign capital.

“We expect the Brexit uncertainty to continue weighing on domestic activity, and this should also mean that the Bank of England (BOE) is unlikely to provide any support to Sterling. There should be no hikes this year, and the BOE should remain on hold,” says Krpata

Forecasts for the Pound

Of the two major Sterling pairs GBP/USD is likely to fare worse because of ING’s bullish outlook for the U.S. Dollar.

“With EUR/USD under pressure and the pair likely to move toward 1.10 level this June, we see even more downside potential for Sterling against the Dollar, rather than against the Euro, and we expect the GBP/USD cross to slowly converge towards the psychological 1.20 level in months to come,” Says Krpata.

ING look for EUR/GBP to reach the 0.90 by summer this year.

0.90 translates to 1.1105 for the Pound-to-Euro exchange rate.

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