The Pound-to-Euro Rate will Remain Range-bound says Westpac

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- Pound to remain limited by leadership and no deal Brexit threat.

- Euro to remain pressured by Italian budget row with Brussels.

- Dollar to rise as economic stimulus encourages Federal Reserve.

The Pound-to-Euro rate will be kept under pressure by ever-present Brexit threat to Prime Minister Theresa May's leadership and the 'mission impossible' posed by the Irish border question, according to analysts at Westpac.

"Rebounds in GBP should be sold," says Tom Riddell, an analyst at Westpac. "GBP/USD above 1.3150, GBP/AUD above 1.8400, unless there is a surprise break on the Irish border and leadership disruption avoided."

The U.K.'s dysfunctional minority government risks spawning a leadership challenge, according to Riddell. And even if one is averted, the next hurdle for the prime minister is to secure a deal before March 29 - an outcome that is far from guaranteed.

If May is usurped by a new leader there is a high risk of another general election and the uncertainty that goes with it would trash Sterling all over again.

And even if a 'new leader' were to avoid an election, would they be able to put a credible Brexit deal together that is better than Chequers?

With so much political uncertainty hanging over the Pound the outlook for the British currency remains negative, the Australian lender says.

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Pound-to-Euro to Remain Range-bound

Any resulting downside for the Pound may be limited in its pairing with the Euro, however, since Westpac also has a bearish outlook for the single currency.

The Italian budget row remains the key threat to the Euro. Italy, which has a 132% debt-to-GDP ratio and is proposing a 2.4% 2019 budget deficit that will add to that debt, has clashed with the European Commission. Other countries like France, Belgium, Spain, Slovenia, and Portugal all have high debt levels too. 

Riddell says the Euro, which has already fallen by more than 4% against the Dollar in 2018, is at risk of further losses if the Italian budget row is not resolved anytime soon.

A deteriorating economic backdrop is a further cause for concern, according to Riddell, now the Eurozone's growth and inflation metrics have turned lower. Recent PMI figures showed sentiment in the services and manufacturing sectors collapsing to its lowest levels for a number of years.

On top of that, the ECB is on autopilot, hoping to end its quantitative easing programme in December and to start raising rates at the end of summer 2019. This will take a crucial crutch of monetary support away from the region just as things are turning bad again.

Overall, this suggests a range-bound outlook for the Pound-to-Euro rate, according to Riddell. 

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GBP/USD to decline as the USD Strengthens

If the weak Pound is going to fall against any currency it is likely to be the U.S. Dollar, because the "U.S. outperformance narrative" has not yet run its course according to Richard Franulovich, Westpac's head of FX strategy.

The U.S. Dollar could remain strong over coming months because of President Donald Trump's stimulus measures, which have not even finished being implemented let alone seen their economic effects wear off. Most analysts have said Trump's "fiscal boost" will begin to fade in 2019.

Only tax cuts have been implemented so far. Next come the spending promises, which are set to see $300bn invested in various infrastructure projects for the full-year 2018 and 2019. This suggests America's 'sugar high' will last for a bit longer, according to Westpac.

"The "$300bn spending increase agreed in the March 2018 Omnibus bill is spread over two years (i.e. including 2019), and it would be very surprising if tax cut stimulus suddenly waned just 12 months after introduction," says Franulovich.

The overall economic outlook also remains strong. US regional PMI's are "cresting", average hourly earnings are likely to breach 3.0% soon and 10-year bond yields are likely to hold current ranges. These are all factors that could encourage further Dollar upside.

Franulovich and the Westpac team say it is possible the GBP/USD pair could see more downside over the medium-term as the Dollar outperforms and the Pound limps along in a malaise of uncertainty.

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