Pound Sterling Outlook: More Gains Ahead vs. Euro and Dollar Now Brexit Transition Deal is in the Bag

- Pound-to-Euro exchange rate = 1.1433, up 0.7%, Pound-to-Dollar exchange rate =1.4066, up 0.90%
- Interest rate expectations to now take control of Sterling's future say UBS
- ING say GBP/EUR at risk of a move to the 1.16-1.157 range

© European Union, 2018   /  Source: EC - Audiovisual Service   /   Photo: Mauro Bottaro

Analysts have told us they are forecasting further gains for the British Pound now that the UK and EU have agreed on the details of a transitional period that will govern an orderly withdrawal of the UK from the EU, starting in March 2019.

This is a clear signal to business that it's 'business as usual' for the next two years, and the prospect of any 'hard exit' are now virtually nullified; all of which is good news for Sterling.

In particular, news of a transition will almost certainly encourage the Bank of England with regards to the economy's outlook, and the prospect of a May interest rate rise is further cemented.

This should provide a solid underpinning for the Pound; indeed according to Lefteris Farmakis with UBS, it is expectations for future interest rate rises that will come in response to the transitional deal being struck that will be important for Sterling.

"Most of the upside for Sterling is likely to arise from the more traditional channel of rate differentials rather than risk premium unwind," says Farmakis.

UBS calculate for every 25bps of additional rate hikes priced in for the BoE vs ECB, the GBP/EUR rises by c.2%. The repricing of the relative policy stance by a modest 25- 50bps is fairly plausible, in their view.

Accordingly, sterling could gain by up to 4% vs EUR, implying an upper bound for GBP/EUR at around 1.1765.

Other analysts agree that further gains for the UK currency are now likely.

"We see a deeper correction in the EUR over the coming weeks, as positioning unwinds a bit. This reflects the loss of data momentum and stretched valuations even though we prefer to use dips towards 1.21 as buying opportunities. Any progress on a Brexit deal this week favours some downside in EURGBP with a focus on the January lows of 0.8687," says Mark McCormick with TD Securities in New York.

EUR/GBP at 0.8687 gives us a Pound-to-Euro exchange rate at 1.15 which represents the top of the exchange rate's six-month range.

Viraj Patel at ING Bank says:

"We believe that GBP’s re-pricing of Brexit transition optimism is now complete – and revert our attention back to UK economic fundamentals to determine the scope and extent of any GBP appreciation over the coming weeks.

"A Brexit transition agreement is one element of GBP’s bullish trifecta this week; if all the cards were to fall perfectly into place – and we also see a status quo hawkish Bank of England policy message and constructive UK wage inflation data – then we would not rule out a sharp move in GBP/USD up towards the year-to-date highs around 1.4250-1.4300."

Of the Pound-Euro exchange rate, Patel says there is a greater risks of a move to the 1.16-1.157 range in the near-term.

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