Wait Until 2018 for British Pound Recovery say Wells Fargo Forecasters
- Latest Quotes (Markets Closed):
- Pound to Euro exchange rate: 1.1787
- Pound to Dollar exchange rate: 1.2889
Pound Sterling is expected to continue to soften in 2017 ahead of a soft recovery through 2018 a leading investment bank has stated.
“We expect the Pound to soften over the course of 2017 and into 2018, with U.S.-U.K. monetary policy dynamics stacked against Sterling in the coming months,” says currency strategist Nick Bennenbroek, of Wells Fargo.
With the Federal Reserve still expected to hike rates twice this year and the Bank of England (BOE) expected to be on hold through 2017 and 2018, the Dollar has a bullish outlook versus Sterling.
Currency’s with relatively higher interest rates tend to outperform others as capital flows to where it can get the best interest returns for the least risk.
The bank is less bearish for the Pound against the Euro which they see as also vulnerable to softening during the rest of the year.
The picture for GBP/EUR is a little more nuanced with Sterling's recovery more or less being covered by a similar recovery seen across the Euro strip.
“We see only mild Euro softness in 2017 and expect renewed Euro strengthening from 2018. Growth is solid, confidence surveys have firmed, and political risks have diminished,” says Bennenbroek in a note dated May 11.
A significant ingredient for more Euro strength, however, will be the evolution of European Central Bank (ECB) policy.
Fargo see ECB policy tightening in 2018, and possibly giving the currency a bigger boost:
“The European Central Bank’s policy shifts could pick up in pace next year, leading to euro gains during 2018.”
They also see the Pound gaining as the UK economy proves unexpectedly resilient to the impact of Brexit and the BOE start to firm up their policy guidance.
Overall they see limited volatility in the pair due to a similar outlook for the Euro and Pound, of weakness in 2017 turning to modest strengthening in 2018.
“We expect a turn from Pound declines to pound gains as 2018 progresses and monetary policy dynamics become more supportive of sterling,” says Bennenbroek.
Political risks around Brexit and expectedly tough negotiations with the EU are a significant downside risk to the Pound not shared to the same extent by the Euro which could bias EUR/GBP to more upside.
The Dollar, meanwhile, may see its reign challenged in 2018 as other currencies benefit from lagged normalisation in their respective central bank policies.
The bank’s analysis leads to the following forecasts:
GBP/USD is forecast at 1.27 in three months time, ahead of 1.25 in six months and 1.24 in 12 months.
From here, the exchange rate starts recovering back to 1.27 in 18 months.
EUR/GBP is seen at 0.8425 in three months, 0.84 in six months, 0.8375 in 12 months and 0.85 in 18 months.
From a Pound into Euro perspective this equates to 1.1869, 1.19, 1.1940 and 1.1765.
The stance held at Wells Fargo is similar to that held by the foreign exchange analysis team at Intesa Sanpaolo where the Pound is seen weakening over the coming three months.
It is within this short-term timeframe that the majority of the negativity stemming from Brexit is likely to be experienced.
Beyond here a more sustainable recovery in the Pound becomes possible it is argued.
