Credit Suisse Back the British Pound to Rise Against Dollar and Euro (But it is Conditional)

Pound Sterling is to shake off Theresa May’s leadership dramas says a leading foreign exchange analyst who suggests the Pound will rise against the Euro longer term.

Credit Suisse have told clients they should look through the short-term headline-induced noise besetting the Pound Sterling and expect a gradual recovery higher.

The call comes as the Pound suffers another bout of volatility following Prime Minister May’s speech to the Conservative Party conference on October 4 which “was notable for reflecting a heightened sense of political risk and crisis surrounding her premiership,” says Shahab Jalinoos at Credit Suisse in New York.

The vulnerability of May was confirmed by a failed attempt to pressure her out of office, headed by former Party Chairman Shapps. As a result, the GBP stood out last week as the notable under-performer among G10 currencies.

Credit Suisse note both the leadership challenge and its subsequent failure suggest that
the domestic political dynamic in place since the election remains intact.

While May’s premiership is weak, beleaguered and subject to intermittent challenges, Credit Suisse do however believe it is likely to endure for the foreseeable future in the absence of an obviously better candidate and with party discipline being enforced by a resurgent Labour Party and the winner-take-all nature of a first-past-the-post electoral system.

“Thus, the leadership drama induced weakness in GBP is unlikely to persist, in our view,” says Jalinoos who adds the drama induced by headline-watching “merely represents underlying noise that we warned of when we set out our neutral short-term / bullish long-term view versus the EUR on September 21.”

We have maintained an approach similar to that mentioned above - markets are often too readily swayed by the media circus surrounding British politics. Nevertheless, keeping a finger on the pulse of the media cycle is still important in that it moves the currency and we correctly called the Pound's rise at the start of the week when May was seen consolidating power.

Credit Suisse forecast the Pound-to-Dollar exchange rate will trade at 1.386 in 3 months
and 1.453 in 12 months.

The Euro-to-Pound exchange rate is forecast at 0.880 in 3 months, 0.860 in 12 months. This gives a Pound-to-Euro exchange rate at 1.1360 and 1.16 respectively.

“However, a successful leadership spill unseating May or marked deterioration in negotiations with the EU would challenge the assumptions underlying our view, and likely cause us to revisit our forecasts accordingly,” says Jalinoos.

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