Germany's Helaba Eye Recovery in British Pound / Euro Rate but Warn on E.U. Spoiling Tactics in Brexit Negotiations

Germany’s Helaba Landesbank Hessen-Thüringen has warned that Pound Sterling is looking particularly cheap against the Euro and believe some correction in the market is necessary as a result.

Helaba also warns that the Euro faces potential “disillusionment” amongst investors in a briefing dated August 29.

As a result, the latest forecasts issued by the German lender, show Sterling should actually rise back into a higher range from here.

To be sure, the pressures facing Sterling remain significant with politics being an ongoing concern for Sterling’s outlook argues Helaba’s Christian Apelt in a briefing note issued this week. 

The analyst cites the Conservative Party’s lost majority in the House of Commons as being a downer, but new elections are not seen as an attractive option for the party so some stabiltiy here out should be expected.

E.U. to Drive a Hard Bargain

Meanwhile, Alpet is not convinced that the U.K. and E.U. will be able to agree a meaningful transitional agreement within the time remaining within which to negotiate ahead of Brexit in March 2019.

Indeed, Alpet believes the Europeans will “for tactical reasons” not initially agree to any transitional period.

We have heard of late from analysts suggesting the downside risks to Sterling are receding as the prospect of a cliff-edge Brexit where no transitional period are seen receding.

For example, J.P. Morgan have cut the probability of a hard-Brexit, which is defined as an exit where the U.K. trades with the EU according to WTO rules, from 25% to 15%.

“The long-term risk to GBP from a disruptive Brexit has diminished as most players in the government now accept the need for a transitional deal that will ensure very little changes on the ground for a handful of years after 2019,” says Paul Meggyesi, a strategist at J.P. Morgan.

Helaba’s suggestion that there are tactical reasons to scupper Brexit are therefore a clear downside risk to Sterling’s already troubled outlook.

“The results of the current negotiations are expected to produce few results,” says Alpet. “An agreement on the future relationship is expected at the earliest in mid-2018, presumably Even later, if at all.”

But, Alpet warns the E.U. will feel the “economic pain” of a failure to agree a trade deal.

Still, the European will unlikely blink first and they know for the British, “no deal is no option,” argues Alpet who believes the U.K. will ultimately have to ceded ground to E.U. demands.

“Until then, the road to compromise is still very far,” says Alpet.

But - the Pound is already pricing in this hard road, and as a result looks very cheap.

“There is already a considerable risk premium for this scenario,” says Alpet. “Based on mean- Adjusted purchasing power parities or real exchange rate indices, the Pound is clearly underestimated.”

"Glances of Light" for the Pound

Despite pointing out the obvious stumbling blocks that lay ahead for Sterling, the question of the British Pound’s notable undervaluation makes it increasingly liable for stabilisation and a limited recovery.

“The environment for the pound sterling remains uneasy,” says Alpet. “In view of the low However, the risk of loss is limited. The first delicate political glances of light, such as in the ongoing Brexit negotiation round should suffice for a Pound recovery.”

“The political ups and downs of the Euro-Pound exchange rate should see it fluctuate in the range of 0.85 to 0.90.

This gives a Pound-Euro exchange rate range of 1.1765 and 1.11.

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No Decisive Signal For Sterling on Latest Brexit Negotiations

Recall Helaba's assessment that the E.U are likely to "tactically" avoid yielding on a transitional deal?

The results of the third round of Brexit negotiations suggest this is indeed the case.

A briefing held in Brussles by head negotiators Michel Barnier and David Davis suggest little headway on the major sticking points to negotiations.

Of interest, Davis suggests the E.U. are not showing the requisite flexibility required to negotiate.

Rather the E.U.'s rigid template is seen as being an issue holding back progress.

"Temperatures have spiked again this morning in the beleaguered Brexit negotiations, with trade secretary Liam Fox warning the EU can’t “blackmail” Britain into an excessive divorce bill," report the Guardian on September 1.

Speaking in Tokyo, Fox was asked whether Britain should agree a quick financial settlement to clear the way for trade talks.

“We can’t be blackmailed into paying a price on the first part,” Fox replied. “We think we should begin discussions on the final settlement because that’s good for business, and it’s good for the prosperity both of the British people and of the rest of the people of the European Union.”

However, there are some positives to be taken away from the latest moves in Brussels.

Both Barnier and Davis reported that both sides worked with a constructive spirit this week, in the interest of both sides, showing their commitment to reaching an agreement.

The most important aspect was Barnier’s statement, at the end of the press conference, that the EU is ready to speed up negotiations if necessary.

Analyst Asmara Jamaleh at Intesa Sanpaolo suggests this is the E.U. implicitly responding to the request made over the past few days by the British government to increase the frequency of negotiations sessions, so as to move on as soon as possible to discussing new trade relations.

"This represents a positive development for the Pound," notes Jamaleh.