Sterling 'Bulls' UniCredit Lower their Forecasts for the Pound vs. Euro and Dollar
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- Pound under pressure on Tuesday, Construction PMI report cited
- Analysts at UniCredit cut forecasts for Sterling
- But Brexit deal still base-case expectation, should spark recovery
Pound Sterling was seen under fresh selling pressure against the Euro, U.S. Dollar and other major currencies following fresh survey data that suggests the UK economy is undergoing a rapid slowdown as it passes through the mid-year mark.
The declines come as we are able to report UniCredit Bank - long-time optimists on Pound Sterling - have again lowered their forecasts for the currency, but not by enough to cancel their view that a recovery in the currency will still occur by year-end 2019.
The decision to cut forecast targets betrays fading confidence for a substantial recovery over coming months and comes amidst a broad slump in the value of the Pound and growing nerves amongst analysts that a messy Brexit outcome awaits.
The Milan-based bank has for some time proven to be an outlier in the field of currency forecasting with their targets for GBP/USD and GBP/EUR tending to be higher than their peers in the industry.
Lying at the heart of UniCredit's forecast model for Sterling is the belief that a Brexit deal will be reached between the EU and UK, an outcome that will spur a determined rally by Sterling.
But, "now that the Brexit deadline has been shifted to 31 October, we have slightly lowered our targets," says Roberto Mialich, FX Strategist with UniCredit Bank in Milan. "However, we still expect a negotiated deal to eventually occur. Therefore, Sterling is still set to rally afterwards in our scenario."
Both leadership contenders to replace Theresa May - Jeremy Hunt and Boris Johnson - have said they would look to reach some kind of negotiated settlement with the EU to govern the UK's exit.
Hunt is leaning on attaining modifications to the current Brexit deal, struck by May, with the view of it ultimately passing through Parliament despite it having already been rejected by the House of Commons on three occassions.
Johnson appears the more ambitious of the two, looking to take pieces of the current deal that work but arriving at a mechanism that ultimately sees current trading relationships maintained while a free trade deal is negotiated.
Understandably, markets are nervous of Johnson's approach, and the Pound has been in a concerted move lower since early May when markets realised change was afoot in UK politics and that the odds of a 'no deal' Brexit were rapidly increasing once more.
"His “do or die” pledge to leave the EU on the 31st October has heightened 'No Deal' Brexit fears. We continue to believe a General Election or second referendum will be required to break the deadlock if parliament votes to prevent a 'No Deal' Brexit. We believe there is scope for further Pound weakness heading into the autumn," says Derek Halpenny, Head of FX Research at MUFG in London.
However, Johnson has said he does not believe "for a moment" that a 'no deal' Brexit will take place on October 31. "It is not where I want us to end up, it's not where I believe for a moment we will end up," Johnson said of a 'no deal' Brexit in an interview with the BBC last week.
UniCredit's belief that he is correct, and that a deal will ultimately be achieved, see them now forecast GBP/USD to trade at 1.32 by the end of September 2019 and 1.38 by year-end. Previously, 1.40 was expected to be achieved by year-end.
Pound-to-Euro exchange rate forecasts are meanwhile revised lower to 1.15 and 1.16 the third- and fourth-quarters respectively. 1.19 was expected to be achieved by year-end in UniCredit's previous set of forecasts.
The latest targets put UniCredit back into the realm of being in line with consensus: consensus forecasts for GBP/USD suggest the exchange rate will end the year at 1.30, while consensus shows GBP/EUR ending the year at 1.1518.
Also expecting a pick-up in the value of Sterling over coming weeks are the team at independent economics consultancy Capital Economics who say the Pound is set to recover all of its recent losses to the Euro over the summer months.
However, the Pound-to-Euro exchange rate increase is expected to be more a function of weakness in the European single currency rather than a universal recovery by the British unit.
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Sterling Under Pressure as UK Economy Stalls
UK Construction PMI for June suggests the country's construction sector has fallen deeper into contraction territory.
The reading of 43.1 is sharply down on the previous month's reading of 48.6, and well below analyst expectations for a reading of 49.3 to be delivered.
Indeed, June 2019 will represent the worst Construction PMI in ten years.
"June data revealed a sharp loss of momentum for the UK construction sector, with business activity and incoming new work both falling at the fastest pace for just over 10 years," reads a statement from IHS Markit, compilers of the report. "The slide in construction demand was mainly attributed by survey respondents to risk aversion among clients in response to heightened political and economic uncertainty."
The disappointing construction sector numbers come a day after the Manufacturing PMI confirmed the manufacturing sector of the UK economy is also in contractionary territory.
Both hint at a disappointing reading from the headline Services PMI due out Wednesday.
"All eyes are on the services figure tomorrow, with a dire future for an already beleaguered Pound in store should this vital figure turn southwards," says Chris Beauchamp, Chief Market Analyst at IG. "Oddly enough, the Bank of England continues to mention a rate hike as if this was some kind of option for an economy facing serious headwinds, but perhaps the latest deterioration, plus the general dovish shift from other central banks, will be enough to finally put the idea to rest."
Sterling has seen steady selling pressure against the Euro since mid-morning when the Construction PMI was released
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