"What's Cheap Can get Cheaper": Citi on the British Pound Outlook

Citi Pound Sterling forecast

Image © John Gomez, Adobe Stock.

- Longer-term the downside risks are growing

- But near-term stability seen as markets await developments

- Official forecasts see GBP treading current ranges for months

Pound Sterling is forecast to maintain current levels against the Euro and U.S. Dollar over coming months but the risks of a more sizeable depreciation are growing warns the world's largest dealer of foreign exchange.

Analysts at Citibank confirm they see Sterling retaining its rangebound trends against the two majors longer-term while near-term stability in the currency is likely to persist as the markets adopt a wait-and-see approach on whether Prime Minister Theresa May can sell her Brexit deal to a sceptical parliament.

However, it is on the dangers of failing to get a Brexit deal in place before March 2019 that the greatest risks to Sterling reside.

And these risks are growing.

In a briefing to clients, Citibank say "political uncertainty may cause significant downside risks."


Near-Term Stability

The EU and UK over the weekend agreed to a deal that must now be ratified by parliaments either side of the English Channel; reaching this milestone "may stabilise the GBP in short term," say strategists.

Indeed, the Pound-to-Euro exchange rate appears to be stuck in a range around the 1.1250 area and many analysts expect this area to remain in play over coming weeks as Prime Minister May embarks on a concerted push to sell her deal to a wary parliament.

Those looking to make international payments can therefore look for their bank to charge in the range of 1.0969-1.1450 while independent specialists will likely be offering exchange rates in a bracket of between 1.1160 and 1.1180.

"The situation remains extremely fluid and so commentary can quickly become stale," says Alex O'Mahony, an analyst with Citibank in London. "With news flow offering the only reactive measure at the moment, watch for a binary GBP move in the key crosses, with large positioning unlikely until transparency is seen."

There is trouble at home as most political commentators put the number of Conservative party MPs who are willing to vote against their government's Brexit deal at around 89, which is more than half of all May’s backbench MPs.

With the "meaningful vote" on the deal set to take place on either December 10/11, the PM has just two-and-a-half weeks to turn things around. "Sterling remains vulnerable between now and deal ratification, and given the ongoing political uncertainty it may be too early to see a sustained rally," say Citi analysts in a separate note to Private Wealth clients.

Also to be watched is the DUP (part of the ruling coalition) that has already sent a warning shot against the Withdrawal Treaty.

It is expected May will however go back to Parliament after the first attempt with an amended deal.

Unfortunately without European collaboration on the matter the bill will fail to pass. Brussels have warned that the deal won't be changed so we wonder what May's strategy on any second vote would be.

Citibanks’s base case does however remain that a deal to be reached as there is little appetite for a “no deal” Brexit in the UK parliament.

This outcome should ultimately prove supportive to Sterling.


Longer-Term Risks Growing

Citi Pound Sterling forecast

"Political uncertainty may cause significant downside risks," warn Citibank. "It seems likely that the draft UK-EU withdrawal agreement will be voted down by the “Meaningful Vote” in the House of Commons. Therefore, the probability of a market friendly transition arrangement are falling fast."

The UK is facing completely unchartered waters on economic and political spectrum.

"What’s cheap can certainly get cheaper," add Citibank.

Sterling has been linked closely to UK political risk and is near the bottom of its 1.275-1.315 range in November.

One-month GBP/USD implied volatility is now at close to 13%, its highest level for nearly two years.

Citi’s Chief Political Economist, Tina Forham, argues the current government has neither the unity or the legitimacy needed to deliver a confident and smooth Brexit.

"If true – the risks to GBP remain elevated, especially in higher beta crosses such as GBP/USD and GBP/JPY," say Citi analysts who feel the most likely scenarios are either ‘Never Brexit’ or a ‘No Deal Brexit’ as we currently stand.


Citi Forecasts

Citi are forecasting the Pound-to-Dollar exchange rate to trade at 1.26 in three months and 1.30 in 6 to 12 months.

The Pound-to-Euro exchange rate is meanwhile forecast at 1.11 in three months and 1.10 in the 6 to 12 month timeframe.

We can meanwhile report that consensus estimates for GBP/EUR have been raised for the 3, 6 and 12 month timelines. We recommend downloading the November exchange rate forecast report from Horizon Currency to see where over 50 of the world's leading investment banks and financial institutions are expecting GBP/EUR to trade through 2019.

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