Pound to Rally Over Next 12 Months shows the 'Wisdom of the Crowd'

© Savo Ilic, Adobe Stock

- Majority of respondents to Reuters poll think no-deal is unlikely

- Results less optimistic than a month ago, however

- Greater uncertainty reflected in wide variance of forecasts

If the 'wisdom of crowds' is anything betting on a recovery in the British Pound would be reasonable as a recent poll of experts sees Sterling rising against both the Euro and the US Dollar in the coming year.

The appreciation, however, is based on the important assumption that the UK will leave the European Union with a deal.

A Reuters poll conducted between August 31-September 5, showed a median forecast of 50 FX specialists expected one Pound being able to buy 1.1115 Euros in a month's time (0.90 EUR/GBP); 1.1234 in six months (0.89), and 1.1363 in a year (0.88).

Against the Dollar, the same poll, showed median expectations that a Pound will be able to buy $1.28 in a month, $1.32 in six and $1.37 in year – which would mark roughly a 6% rise from current levels.

Despite the bullish forecasts the poll results represented a decline from the results of the same poll conducted a month ago.

Even if the predictions materialise they will still mean that the Pound will not have managed to recover to the same level it was at before the June 2016 referendum.

The dip in median forecasts highlighted increased Brexit uncertainty and "market doubts as a deadline approaches for when the two sides want to have thrashed out a deal," says Jonathan Cable, a correspondent for Thomson Reuters news.

If the UK leaves the EU without a trade deal the poll suggested the Pound would fall by an average of 8.0% in the immediate aftermath. The most pessimistic response to the question of how much lower Sterling would go post a no-deal Brexit showed a 15.0% slide.

"If the negotiations should collapse, or if the agreement is rejected by some EU country or by the UK Parliament − causing the UK to leave the EU without an agreement next year − there is a risk that the pound will depreciate dramatically, especially against the dollar," say analysts at Skandinaviska Enskilda Banken AB in Stockholm.

A separate Reuters' poll this week put the average probability of a hard Brexit at 25%. Some would argue this was a little on the optimistic side, however, given the lack of time before the official deadline in March.

"The risks to our forecasts are tilted to the downside," said Valentin Marinov, head of FX research at Crédit Agricole - the bank has already revised down its forecasts in light of the increased chances of no-deal.

Another risk was that even if the EU and UK eventually arrived at a mutually beneficial and business-friendly trade deal, there might be a prior period of "heightened political uncertainty and growing fears about a no-deal Brexit," which could still push the Pound lower in the short-to-medium term.

Representing the more bullish side of the coin was Kamal Sharma, director of G10 FX strategy at Bank of America Merrill Lynch.

"Our high conviction view remains that a deal will be reached ... we think this will take GBP/USD back above the $1.30 level and towards $1.35," said Sharma.

The wide variance in the range of forecasts, from $1.20 to $1.41 GBP/USD in six months time, around when Brexit is due, and $1.2258 to $1.51 in a year, was seen as evidence of heightened uncertainty about whether the EU and UK would successfully broker a deal before the deadline.

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