Pound Sterling vs. Euro and Dollar Outlook: Strategists say Keep Selling

Anxiety over the direction of Brexit negotiations remains elevated, yet the British Pound is well above its post-referendum multi-year lows against all major currencies. We ask the analyst community the ever-important question, "where next for Sterling?"

The British Pound was the week's best performing currency in the week 6-10 November; renewed political angst in the UK, centred around Brexit, has however flipped Sterling's fortunes and the currency is now decidedly less-assured this week.

Despite this week's release of softer-than-expected UK October inflation headlines, the Pound-to-Dollar exchange rate appears to be trading within the middle of its recent ranges against the Dollar, largely on the back of renewed Dollar weakness. 

The exchange rate is seen trading at 1.3140, having gone as low as 1.3060 earlier in the week.

The Euro is meanwhile the week's stand-out performer, putting a poor run behind it and advancing against all the G10 currencies. As a result, the Pound-to-Euro exchange rate is seen trading back down at 1.1147, levels last seen on October 20.

Concerning the outlook, we note foreign exchange strategists are expressing a strong preference to fade any strength in the British Pound, particularly in the short-term.

We have asked a number of analysts on how they see Sterling performing and note that while there is a good chunk of the community looking for further Sterling weakness, there are still some out there who see recovery potential, albeit in the long-term.

Manuel Oliveri at Crédit Agricole:

"The GBP has been under pressure this week, mainly due to the rising risk of PM May facing a leadership challenge. Elsewhere, there must be agreement with the EU as when it comes to citizen rights and divorce bill by the end of next week in order to lay the ground for transition period-related negotiations.

"We see scope of further Euro upside towards the end of the year, regardless of unchanged central bank rate expectations. If anything, we believe it will be about an improving capital flow situation to lead the currency higher.

Piet Lammens at KBC Markets:

"EUR/GBP currently trades in a 0.8733/0.9033 consolidation range. A downside test of this range was rejected. We assume that the 0.8733-0.8652 support will be tough to break. A EUR/GBP buy-on-dips approach for return action to the EUR/GBP 0.9023/33 short-term range top is favoured."

An Euro-to-Pound short-term top gives us a short-term target on the Pound-to-Euro exchange rate at 1.1080.

Mathias Røn Mogensen at Danske Bank:

"The growing political pressure on Theresa May could continue to build an underlying negative tone on GBP. We still see EUR/GBP within the 0.8650-0.90 range near-term, skewed to the upside as UK politics, relative interest rates and growth are likely to remain EUR/GBP supportive in coming months."

Chiara Silvestre, Economist at UniCredit Bank:

"An additional headwind is the frustratingly slow progress in the Brexit negotiations, with Michel Barnier, the EU’s chief Brexit negotiator, saying that the union is preparing contingency plans for the possibility of no deal being reached in the talks with the UK.

"This is not something new, but it is still likely to have a headline-negative impact on the exchange rate. Evidence of this can be seen in sterling implied volatility, which has increased these past few days across most tenors.

"So far, the 1.30 area in GBP/USD has proven to be a strong support level and – in the absence of a significant deterioration on the political front – we think it will continue to hold for now. Therefore, we expect cable to trade in the 1.30/1.31 region for now, with very limited upside potential. EUR/GBP should remain supported, likely trading between 0.89 and 0.90."

EUR/GBP at 0.89-0.90 gives us a GBP/EUR range at 1.1236-1.11.

Jane Foley at Rabobank:

“It is our view that GBP remains vulnerable to political uncertainly going forward most specifically regarding Brexit. Although we are optimistic that an EU/UK trade pact will eventually be agreed, all Brexit proceedings to date suggest that this could be a last minute compromise.

“In the meantime uncertainty is likely to weigh on UK investment and growth potential.

“The implication  is that GBP has the potential to slip further on a 12 month view before snapping back around March 2019. We retain a 12 month forecast of EUR/GBP 0.95.”

EUR/GBP at 0.95 gives us a GBP/EUR target of 1.05.

Adolfo Laurenti, Global Economist at J Safra Sarasin:

"Our latest forecasts show the British economy to decelerate from 1.5% GDP growth in 2017 to 1.3% in 2018 and 1.2% in 2019.

"The depreciation of the Pound, which we see close to parity with the Euro by year-end 2019, will keep a lid of consumer spending, as real wages will continue to suffer of headwinds from higher inflation."

The Euro-to-Pound exchange rate is forecast at 0.90 by the end of 2017, 0.91 by the end of March 2018, 0.92 by mid-2018 and 0.95 by end-2018.

This gives us a Pound-to-Euro exchange rate forecast of 1.11, 1.09, 1.0870 and 1.05 respectively.

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But, it's Not All Doom-and-Gloom, Sterling Could Yet be the Comeback Kid

While Sterling faces its challenges there are those in the analyst community that caution against the pervasive Brexit-orientated pessimism and see progress being made on the matter.

Others also point out that the state of the UK economy is not as dire as is often assumed, and therefore the Bank of England will be able to deliver supportive interest rate rises over coming months.

Lee Hardman at MUFG:

“The UK government is reportedly not expected by the EU to put a number on a financial offer at this stage but will have to have given an indication of their methodology including previous unpaid commitments.

“Our outlook for a stronger pound heading into next year is built on the assumption that sufficient progress will made during Brexit talks in the coming months.”

Ulrich Leuchtmann at Commerzbank:

“There are rumours that US banks are intending to still carry out a large share of their European business from London (as far as regulatory issues allow).

“So that leaves many market participants to hope that even in a worst case (i.e. in case of a super hard Brexit) the economic damage will be limited so that there is no fundamental reason for GBP weakness. I follow this view.”

Read more on this view here.

John Higgins, chief markets economist at Capital Economics:

“We continue to think that the markets are underestimating how quickly rates will rise in the UK as the economy weathers the uncertainty over Brexit well.”

“We think that UK monetary policy will provide some renewed support to sterling before long.”

More on this view here.

Kit Juckes of Société Générale:

“The level of relative rates at the front end of the curve is very strongly tilted in Sterling’s favour, and while I don’t think that matters much, it does mean that pushing EUR/GBP up is a bit like pushing a stone up a hill.

“Not the full Sisyphean ‘push it up and then get flattened when it rolls back down’ metaphor but hard work all the same.”

Get up to 5% more foreign exchange by using a specialist provider by getting closer to the real market rate and avoid the gaping spreads charged by your bank for international payments. Learn more here.