Time to Buy Pound Sterling vs. the Euro is Approaching as "Brexit Pessimism Overdone" says one Strategist

Buy the Pound

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The time to buy Pound Sterling and sell the Euro is approaching says one institutional strategist willing to row against a trend of selling pressures as a recovery in the Pound-to-Euro exchange rate should shape up once a new Prime Minister is installed.

Westpac Institutional Bank - the global investment banking arm of the Sydney-based lender Westpac - say the decline in the GBP/EUR exchange rate is now looking very mature and key technical levels should provide some support to the beleaguered currency.

Richard Franulovich, Head of FX Strategy at Westpac in New York, says he is however waiting for the Pound to fall to a more opportune 'entry' point from which to buy, suggesting the current run lower might have a little further to run.

The Pound fell sharply on Tuesday as headlines suggest Prime Minister Theresa May's likely replacement - Boris Johnson - was seriously considering ditching the Northern Ireland backstop in its entirety and was seeking ways to bypass parliament to deliver Brexit on October 31.

"Calls for the next UK leader to purge cabinet of ”remainers” and pledges by both candidates to scrap the Northern Ireland backstop (even as the EU repeatedly rules out reopening May’s withdrawal agreement) have raised no-deal Brexit risks," says Franulovich.

The exchange rate fell to a new seven-month low at 1.1050, but Franulovich and his team are looking for the exchange rate to fall to 1.1007 before buying Sterling.

At this point the exchange rate is expected to test the "a key" three-year support line, while "momentum indicators look very mature".

Momentum indicators are used by technical forecasters to ascertain where an ongoing trend might run out of steam, when a trend reaches maturity the likelihood of a reversal grows.

Pound can fall further

Above: The purple line highlights the referenced 1.1007 level

But the call to bet on a recovery in Sterling is not built on technical observations alone.

"Brexit pessimism may be overdone. We expect the next leader to have a more inclusive pro-Brussels cabinet, reducing fears of a no-deal Brexit," says Franulovich.

The subtext here is that Johnson might row back on the 'hawkish' tone struck on Brexit on the leadership contest, which could prove supportive to the Pound.

Other market analysts suggest this is an entirely reasonable expectation.

"What is promised on the campaign trail is not necessarily what is delivered. A change of heart, a realisation of the political reality or changes in circumstance are typical reasons why," says Jordan Rochester, a strategist with Nomura.

Rochester believes there is a chance Sterling could move higher in the near-term, but expects volatility in Sterling to resurface towards September when political uncertainties flare up once more.

The new Prime Minister will be announced on Tuesday, July 23 at the Queen Elizabeth 2 Centre in Westminster, and markets will soon find out whether Franulovich is correct: the incoming Prime Minister's initial tone regarding Brussels will be crucial.

And we will find out over subsequent days what his cabinet will look like.

Should the British Pound recover, Westpac is targeting a move to a target at 1.13.

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