Pound Sterling, Euro and US Dollar: Consensus Exchange Rate Forecasts at the Start of September
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- Exchange rate forecasts suggest Dollar giving back recent gains against Euro and Pound
- Euro seen outperforming but ECB policy and Italian politics are key risks
- Sterling is actually seen firming, but this assumes a Brexit deal is delivered by year-end
At the start of September - the final month of the third quarter - we look at the consensus forecasts for the Pound, Euro and US Dollar for the next three and 12 months.
Consensus forecasts are perhaps the best opportunity we have to get a sense of what the collective mind of the analyst community is suggesting about where the major currencies are headed.
Of particular interest to us are the predictions being made for Sterling now that we are entering a crucial climax in the process of negotiating a Brexit deal and the currency is coming under pressure as a result of rising market anxiety.
We are also keen on seeing whether the recent pause in the Dollar's multi-month uptrend is just that, or a potential turning point.
For the Euro, much will depend on whether or not the European Central Bank decides to finally end its gargantuan money-printing programme and to what extent analysts are nervous about further political risks, namely relating to Italy.
The exchange rate forecast targets are collated by Consensus Economics - a leading international economic survey organisation - who regularly poll more than 700 economists each month to obtain their forecasts and views.
Julius Baer - the Swiss-based investment bank - have meanwhile given us their fundamental viewpoints on each currency pointing out the factors that will pose both opportunities for an advance, and risks which could deliver weakness if realised.
The Dollar
Thus far in 2018 the Dollar is one of the top three performers in the G10 and G20 currency spaces with a solid 5.2% advance being registered against the Pound and a 3.5% gain being registered against the Euro.
The trend higher has largely come on the back of US economic outperformance and the associated raising of interest rates at the US Federal Reserve.
Further aiding the currency are concerns for the future of global trade; the Dollar tends to benefit when markets are running scared and liquidating investments into cash. That cash is typically denominated in dollars.
Strategist David Kohl at Julius Baer in Frankfurt cites three risks and three opportunities for the Dollar going forward:
Risks
- A return of risk appetite would promote investments outside the USD.
- Current-account balance, basic balance, and trade balance are negative
- Escalating trade quarrels could prevent the Fed from hiking rates.
Opportunities
- The USD is a structural safe-haven currency.
- Prospect of additional US Fed rate hikes.
- Positive interest-rate differential versus EUR and JPY.
Consensus Forecasts
Collated estimates see analysts forecasting the Euro-Dollar exchange rate at 1.17 in December and 1.20 in a year's time.
The Pound-Dollar exchange rate is forecast at 1.32 in December 2018 and 1.36 by September 2019.
The Dollar-Yen is forecast at 109.90 by December 2018 and 108.80 in one year from now.
The Euro
The Euro has been on the back-burner over recent weeks, largely taking a lead from moves in the other major currencies. However, we note Eurozone economic data points are starting to improve following the poor start to the year and this has in turn injected some strength into the currency.
A strengthening economy should ultimately allow the ECB to pursue its intention of ending the quantitative easing programme in December as scheduled, and eye an interest rate rise befor 2019 is done.
This is seen as a situation that could ultimately support the Euro over coming months, but we do note growing concerns pertaining to Italy and whether or not it will defy Eurozone rules when its new government sets its first budget.
Concerning the outlook, Kohl again cites three opportunities and risks that might influence the single-currency over the coming year.
Risks
- Very attractive as a financing currency.
- Return of political instability with potential antiestablishment government in Italy.
- Efforts by the ECB to weaken the currency.
Opportunities
- Under-owned by international investors.
- The trade surplus ensures money inflows.
- The ECB’s commitment to price stability protects the value of the EUR
Consensus Forecasts
Looking at the price targets laid out by the analyst community we see the Euro-Dollar exchange rate at 1.17 in December and 1.20 in a year's time.
The Euro-Pound exchange rate is forecast at 0.89 by year-end and 0.89 at this point in 2019.
The Euro-Yen exchange rate is forecast at 128.40 by year-end and 126.00 by December 2019.
The Euro-Franc is meanwhile forecast at 1.12 and 1.18 on the above two timeframes.
The British Pound
Sterling's recent woes need no introduction; the continuing anxiety being expressed by markets towards Brexit has left the UK currency under pressure and this pressure is only likely to intensify as markets eye the finalisation of Brexit talks.
A deal was initially pencilled in for the October EU summit, but reality has dawned and the deadline has been pushed back to November.
Expect more deadlines to be pushed back, and with them any end date to this prolonged period of uncertainty for businesses and markets.
Julius Baer's Kohl runs through the key risks and opportunities facing Sterling:
Risks
- A reversal from fiscal austerity; erosion of past fiscal discipline.
- Further uncertainty related economic weakness to disappoint rate expectations.
- Signs that the UK's or EU's Brexit stance continues to lead to a ‘hard Brexit’ (loss of EU single-market passport).
Opportunities
- Brexit transition and robust economy to keep inflation pressure alive and prompt more BoE rate hikes.
- Signs that the EU single-market access will be preserved (‘soft Brexit'), would include a U-turn in the UK's Brexit stance or an accommodating EU.
Consensus Forecasts
The Pound-Dollar exchange rate is forecast at 1.32 in December 2018 and 1.36 by September 2019.
The Pound-to-Euro exchange rate is forecast at 1.1236 on both the December 2017 and September 2019 targets.
The Dollar-Yen is forecast at 144.9 by year-end and 147.90 by September 2019.
The Pound-Franc is forecast at 1.32 and 1.36 respectively.
"Time is running out for Brexit: the withdrawal deal must be ready by January 2019 to allow for ratification. Markets are fearing risks of a no-deal Brexit or political turmoil. To be solved: the Irish border issue, along with a blueprint for the future trade regime after the transition period in 2021," adds Kohl.
Julius Baer still expect a deal as the most-likely scenario; somewhere between free trade and customs union.
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Slowing Economic Surveys a Potential Cause for Concern
Foreign exchange markets will be in full flow on Tuesday, September 04 as US and Canadian markets return from their Monday holiday, as do UK politicians.
The Pound-to-Euro exchange rate is trading flat on the day having given up earlier gains and is being quoted at 1.1086 following the release of a disappointing set of UK construction numbers.
IHS Markit reports construction PMI for August read at 52.9, well below expectations for a reading of 54.9. This is a sizeable drop from July's 55.8 and suggests a rapid slowdown in activity in a sector that has struggled in 2018.
The data comes a day after a worrying picture was painted by the manufacturing PMI which came in at 52.9, below expectations for 53.9.
August construction PMI data pointed to a renewed slowdown in output growth across the UK construction sector, with all three broad categories of activity recording a loss of momentum since the previous month.
Mirroring the trend for construction output, latest data revealed a slowdown in new business growth from July’s 14-month peak. Anecdotal evidence cited resilient client demand and supportive economic conditions, but there were also reports that Brexitrelated uncertainty continued to hold back investment spending.
For concrete signs of any potential slowdown in the UK economy markets will be interested in seeing the outcome of the services PMI due out mid-week. Recall, the services sector accounts for over 80% of UK economic activity.
A good read could provide some stability for Sterling, but markets will be nervous following the construction and manufacturing disappointments.
The decline in Sterling seen over the past 24 hours keeps alive the view that the exchange rate remains trapped in a downtrend and as we cautioned in our week-ahead forecast, ideally we would want to see it breakout from the channel before entertaining the notion that the pair may be reversing its short-term down-trend. As long as it remains inside, it is vulnerable to further weakness.
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