British Pound Forecasts vs. Euro and Dollar Lowered at Barclays

- Bank of England won't raise interest rates in 2018

- EUR/USD weakness could drag on GBP/USD

- GBP unlikely to record a substantial recovery against the EUR in 2018, improvements seen in 2019

Image (C) Pound Sterling Live

Pound Sterling will no longer rise against the Euro and is set to fall against the US Dollar during the rest of 2018, according to the latest currency forecasts from UK high-street lender Barclays issued at the half-way point of 2018

The weaker outlook comes as equal but opposing forces of political uncertainty keep the Pound broadly unchanged against the Euro while the resurgent Greenback continues to pressure the GBP/USD rate. However, an heavily discounted Pound is tipped to recovery in 2019.

A regime shift in foreign exchange markets has seen the US Dollar Index - a broad measure of overall Dollar strength - convert what was a 4% loss during 2018 at the end of the first quarter, into a near-4% gain by the end of June. The strength has certainly been felt by the Pound which is now 1.78% down on the Dollar in 2018.

A strong Dollar plays a meaningful part in Barclays' decision to downgrade forecasts for the Pound-to-Dollar and Euro-to-Dollar rates this month, although much of the case for a weaker Pound is entirely the result of economic and political risk in the UK and Europe.

"Brexit negotiation outcomes and economic data will likely continue to drive Sterling this year," says Nikolaos Sgouropoulos, an FX strategist at Barclays.

The assessment comes just days before Prime Minister Theresa May heads to Brussels to meet her colleagues at the June 28-29 EU summit.

Brexit will be discussed on Friday, June 29 from 08:00 B.S.T onwards, so look for headlines concerning the matter to be delivered throughout the day.

We have seen over recent days a further ramping up of Brexit headlines ahead of the summit, with both sides engaged in jockeying, but, remarkably the Pound has hardly moved on the headlines.

A warning by Airbus that it might quit the UK market on an hard Brexit grabbed headlines and provoked fresh concerns of what the future business environment in the UK looks like; markets are simply looking for concrete outcomes that give a clear view on what the future will look like.

Perhaps this week we will get such outcomes?

UK politics in June saw Prime Minister Theresa May narrowly avoid a damaging defeat in parliament when the House of Commons and the House of Lords both voted to pass the European Union Withdrawal Bill in a largely un-amended form.

A group of "rebels" had threatened to "bring down the government" if the PM did not support an amendment that will have given them and other MPs, many of whom have opposed the government's efforts to withdraw the UK from EU institutions such as the customs union and single market, the power to take control of the Brexit negotiations and send government back to Brussels if they do not like the deal negotiated by the PM.

They also sought to force through 14 other "Brexit-wrecking" amendments drafted in the House of Lords but were defeated by a majority vote after the PM offered a series of assurances that lawmakers will be given a "meaningful vote" on the final deal. This neutralised what was fast turning into another threat to the PM's leadership and stability of the government.

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More Declines this Year, a Recovery Next Year

However, progress in the Brexit talks remains thin on the ground and negotiators have only until October in order to secure agreements on the UK's withdrawal and on the future relationship if any resulting deal is to be ratified in the UK and all parliaments of the European Union before March 29, 2019.

Barclays says uncertainty over whether the government will manage this is one reason why they expect a poor performance from the Pound.

"Short-term momentum for GBP/USD appears to be to the downside given our expectations for further EUR/USD depreciation, slightly softer UK data and no BoE rate hikes this year vs. market pricing of c.20bp of hikes. Beyond this year, our baseline remains for modest GBP appreciation from levels of undervaluation," says Sgouropoulos.

This recovery in Sterling longer-term should coincide with the provision of further details on Brexit, "we continue to expect an orderly albeit lengthy Brexit process, and a 'meaningful vote' in parliament largely eliminates the risk of a cliff-edge scenario, in our view," adds the analyst.

Of the other important driver of Sterling, the Bank of England, Barclays forecast no interest rises in 2018 when markets in general are anticipating a rate rise in August thanks to the Bank of England's June event that contained unexpectedly hawkish guidance.

If Barclays are correct, the gains made by Sterling following the June 21 Bank of England meeting might well have to be given back, and then some.

Changes in rates, or hints of them being in the cards, impact currencies because of the push and pull influence they have on international capital flows and their allure for short-term speculators.

Why Europe Matters for the Pound vs. the Dollar

Sgouropoulos also says the close correlation between the Pound-to-Dollar and Euro-to-Dollar rates is another reason to expect Sterling to weaken this year, as the outlook for Europe's single currency is decidedly bearish.

Italy's government is due to submit its maiden budget, which is expected to place the country further on the wrong side of EU fiscal rules, to the European Commission for approval in October. Fears are that it will spark a diplomatic row and more anti-Euro sentiment in the Mediterranean nation.

Meanwhile, Chancellor Angela Merkel's already-fragile coalition government is clinging to the ropes in Germany after renewed disagreement between coalition partners over migration policy.

A growing scandal that has seen the Chancellor accused of turning a blind eye to corrupt practices at the government's refugee agency is also stoking unease. It is alleged that a German official has granted asylum to ineligible applicants in exchange for bribes.

Both of these plot lines have the power to prompt renewed concerns about political stability in the bloc and to place the Euro under increased pressure during the months ahead.

"We see EUR/USD bottoming at around 1.12 by Q4 18 with only a modest retracement towards 1.14 by Q2 19, at which point we expect Fed rate hikes to be better priced," Sgouropoulos writes.

Forecasts for the Pound, Euro and US Dollar

The Euro-to-Dollar rate was quoted around 1.15 at the time of writing so it will have to fall by nearly 3% in order to reach Sgouropoulos' forecast for the year.

He and the Barclays team predict this movement will help pull the Pound-to-Dollar rate down to from 1.33 to 1.29 before the end of 2018.

They also say the effect of concurrent weakness in both exchange rates will mean the Pound-to-Euro exchange rate rises only to 1.15 this year, when it was quoted at 1.1420 Thursday.

These numbers represent downgrades from Barclays' forecasts just a few weeks ago, when the Pound-to-Dollar rate had been expected to reach 1.44 before year-end and the Pound-to-Euro rate as high as 1.18.

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