Credit Suisse Turn 'Less Bearish' on Pound Sterling

• While the outlook facing the UK currency remains beset by political uncertainty, recent developments suggest there are reasons to become a little more optimistic, particularly on the Brexit front.

A less-confrontational stance by the UK government towards Brexit negotiations is one reason why analysts at Credit Suisse have adopted a more optimistic stance on the British Pound.

The latest briefing comes as the Pound looks to establish itself towards the bottom end of recent ranges against both the Dollar and Euro having endured a 1.46% loss against the Euro and a 2.12% against the Dollar in the month-to-date.

Nevertheless we do get the sense that the Swiss banking giant might have to sharpen their pencils in preparation for issuing some forecast upgrades in the near future, particularly as Sterling is showing a stubbornness to hit new multi-year lows amidst the current cocktail of political uncertainty.

Better Brexit

Credit Suisse note encouraging moves being made by the UK Government with regards to Brexit.

In particular, analyst Shahab Jalinoos says he is encouraged by comments from Chancellor of the Exchequer Hammond suggesting that the UK may push for a transitional deal that sees it remain in the Customs Union for some years before a new arrangement comes into existence.

Delivering his delayed Mansion House speech, Hammond said changes to customs arrangements should be phased in and there should be transitional measures to protect key industries

Also cited as significant in the Brexit debate was well-known Brexiteer Michael Gove’s comments that the economy must take precedence while suggesting he is open to continued EU migration into the UK.

It suggests it is not just re-energised Remainers pushing for moderation.

“We also suspect that, with the government struggling to cope with domestic terrorism as well as the high profile Grenfell Tower tragedy, it may not be in a confrontational frame of mind at the moment and more inclined to follow more consensual approaches. The ongoing difficulties of firming up a pact for the DUP to support a minority government underline the government's vulnerability,” says Jalinoos.

Bank of England Generates Excitement

The other big factor foreign exchange markets are watching with regards to Sterling are developments at the Bank of England which has been the main source of volatility in Sterling in the second-half of June.

The Bank is clearly split in its thinking towards raising interest rates with a surprise 5-3 split in favour of keeping rates unchanged at the June policy meeting catching markets by surprise.

The debate has since advanced with Governor Mark Carney rowing back against this development by saying the time to raise rates was not now in his annual Mansion House speech.

The markets were shaken a little over 24 hours later after the Bank’s Chief Economist told an audience that he believes the balance of risks have now tilted in favour of raising interest rates. 

Haldane is seen as one of the more cautious members of the Bank’s Monetary Policy Committee and the suggestion that he is leaning towards an interest rate rise has set tongues wagging in FX circles.

The Haldane comments came after Credit Suisse had updated us with their latest GBP views as they are expecting the Bank to re-establish a firm consensus in favour of keeping interest rates unchanged at coming meetings.

Outlook for the British Pound

What does this all mean for the British Pound?

“In practice, despite uncertainty, the odds of a soft Brexit have risen, which can only be a good thing longer term for the currency,” says Jalinoos. “These developments encourage us to temper our bearishness on GBP.”

The Pound to Dollar exchange rate is forecast at 1.2780 in the three-month and twelve-month timeframes.

The Euro to Pound Sterling exchange rate is forecast at 0.90 in three-months and twelve-months.

This equates to a Pound to Euro exchange rate of 1.11.

Elsewhere, we report that analysts at Lloyds Bank have downgraded their forecast targets for GBP/EUR.

The call is a reflection of a more bullish stance being adopted on the wider Euro complex in light of the ongoing economic recovery in the Eurozone.

“We have left our forecast for the Pound against the US Dollar unchanged at 1.30 for end- 2017 and marginally lower at 1.34 at end-2018. Our GBP/EUR projection is lower at 1.14 (from 1.16) at end-2017 and unchanged at 1.14 at end-2018,” say Lloyds in a note dated June 22.

However, analysts conceded a great deal of uncertainty exists in their assumptions owing to the unknowns presented by Brexit.

A note of caution that we would emphasise to all readers.

Stay Sidelined on EUR/GBP say UniCredit

Haldane's call for a 0.25% interest rate rise represents an important development for two reasons argues Edoardo Campanella, an economist with UniCredit Bank:

First, Haldane was not part of the three MPC members that dissented last week, demanding an immediate 25bp hike in interest rates.

Second, his remarks contrast with those of BoE’s governor Mark Carney, which reflected a far more cautious tone concerning domestic demand and he was seen as pushing back the possibility of an interest rate hike anytime soon.

This is the right stance to adopt suggests Campanella.

Yet, uncertainty has risen and that comfortable majority in the MPC that does not want to tighten policy looks threatened.

“The shift in Andy Haldane’s stance suggests that there is now a growing divide among the ranks of the monetary policy committee,” says Campanella.

As such, UniCredit believe it is very difficult to know how deep it is (or will become in the future) but it seems to create an extra layer of complexity for figuring out Sterling developments.

“Fundamentally, we remain EUR-GBP bulls and do not anticipate a BoE rate hike anytime soon, but we suspect that sterling’s sensitivity to headline news will increase even further, potentially leading to rollercoaster reactions in the short term. We would advise booking profits in EUR-GBP longs for now and staying on the sidelines,” says Campanella.