Pound Sterling Forecasts vs. Euro and Dollar "Skewed to the Downside" at Barclays
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Foreign exchange analysts at UK high-street lender Barclays have released research that suggests the decline in Sterling is not yet over, and further falls against the Euro and U.S. Dollar are likely.
"We are turning increasingly more bearish on the GBP because Brexit-induced political and business uncertainty is likely to cap any upside for the Pound," says Nikolaos Sgouropoulos, an analyst with Barclays in London.
It is believed the Euro can continue to rise further against the Pound "over the coming quarter as markets re-assess the risks associated with a no-deal Brexit," says Sgouropoulos.
Expectations for both a 'no deal' Brexit and General Election have risen notably since early May after Prime Minister Theresa May's Brexit deal was rejected by the UK parliament and she resigned her position.
Boris Johnson is the firm favourite to replace May, and his firm commitment to leave the EU by October 31 has left markets believing that either a 'no deal' Brexit will be achieved or the Government will be brought down in a vote of no-confidence by a parliament opposed to leaving the EU without a deal.
Johnson has however maintained that he will be working for a new deal as a priority, and in an interview broadcast on Monday night says a 'no deal' is "not where I believe for a moment we will end up".
"While we still envision a deal by year-end, our conviction is generally low," says Sgouropoulos.
Furthermore, Barclays note the domestic economy is slowing, as is the previously resilient UK labour market while a weak global backdrop is unlikely to provide much support to the Pound either.
Barclays see The GBP/EUR exchange rate trading at 1.11 by the end of September, but a recovery to 1.1235 should be seen by the end of the year.
A further recovery to 1.1363 is forecast by the end of March 2020.
Against the U.S. Dollar, Sterling is expected to hold onto current levels.
The GBP/USD exchange rate is forecast to trade at 1.27 by end-September, but a decline to 1.25 is expected by year-end and a move yet lower to 1.23 is predicted by end-March 2019.
"Risks to our GBP forecasts skew to the downside and can materialise either from a realisation of a no-deal Brexit or further delays in the process, with associated increased uncertainty related to an early election or second referendum," says Sgouropoulos.
Looking at current market conditions, Sterling is back at the floor of a short-term range against the Euro, with the Pound-to-Euro exchange rate quoting at 1.1159 on the interbank market at the time of writing. We are looking for support around 1.1150 to hold and confirm that the pair is indeed now subject to a sideways-orientated range that lies between 1.1150 and 1.1250.
This broad range has been respected since June 10 and reflects a market that has adopted a wait-and-see approach as the UK transitions to a new leader. However, given the broader trend of weakness we don't have a high level of confidence that it will be maintained and today's price action will be important in this regard.
The Pound-to-Dollar exchange rate has meanwhile failed to hold above the 1.27 level, in part thanks to a broad-based recovery in the U.S. Dollar witnessed over the past 24 hours.
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UK bank HSBC has meanwhile said Pound Sterling could be in for a rough ride against the Dollar and Euro through the remaining summer months as the mounting threat of both a 'no deal' Brexit and general election will weigh on the British currency.
"The risk of another significant change in politics – whether because of a change in Government or a significant shift in UK-EU relations – will likely create enough uncertainty to keep GBP soft for the near future," HSBC analyst Dominic Bunning says, in HSBC's latest review of currency markets.
However, those looking to transact out of Sterling over coming months should note that HSBC forecast a strong recovery in the UK currency by year-end.
HSBC is still forecasting that the Pound will finish the 2019 year up at lofty levels not seen since the middle of February, which implies a tacit belief the UK will avoid a 'no deal' Brexit as well as a damaging general election that installs the profligate and openly-Marxist Labour Party leader Jeremy Corbyn in 10 Downing Street.
HSBC projections show the Pound-to-Dollar rate will rise to 1.37 by year end, from 1.27 Tuesday, which implies an increase of 7.8% over the next five months.
The Pound-to-Euro rate, meanwhile, is expected to rise by 11.4% from Tuesday's 1.11175 to 1.2450 by the time the curtain closes on 2019.
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