Two of the world's largest investment banks, Goldman Sachs and Morgan Stanley, give their views on the outlook facing the GBP/EUR conversion.
- Goldman Sachs point to eventual GBP/EUR recovery, exchange rate now below minimum forecast level
- Morgan Stanley strategists say traders should continue to chase euro higher
- Euro to pound rate today: 1 EUR = 0.8552 GBP
- Pound to euro rate today: 1 GBP = 1.1694 EUR
Goldman Sachs have called the bottom in the Brexit collapse of the British pound against its Eurozone counterpart.
Pound Sterling has suffered a notable hit over recent weeks tumbling from highs near 1.32 recorded ahead of the referendum result release to the sub-1.20s seen at present.
A lack of clarity on the outlook facing the UK economy has seen businesses pull back on investments and a flurry of European countries start to bid for UK businesses potentially looking to leave for the continent in order to maintain unfettered access to the single European market.
Indeed, leading economic indicators have confirmed that those analysts forecasting a recession at the turn of the new year are accurate.
In response we have noted in our post-Brexit series that the majority of analysts have torn up their previously-held assumptions and are now forecasting the Pound to slip into a range between 1.10 and 1.20 over coming months.
Some, such as HSBC and UBS are even suggesting a fall to parity will take place.
These negative calls largely rest on the assumption that a drying up of foreign investor inflows will result in a necessary adjustment lower in the exchange rate.
The UK imports more than it exports, a situation that would naturally command a lower exchange rate.
However, because the country has always been a popular destination with foreign investors, the exchange rate has managed to defy the import/export equation and command stronger levels.
Whether this can last is now up for debate.
Capital Inflows will NOT Cease
There remains a distinct concern amongst financial analysts that the GBP will be hit by a sudden stoppage in foreign investment into the UK.
For an economy that imports more than it exports this is a big deal for the exchange rate which relies on foreign capital inflows to remain elevated.
A sudden drying up of capital inflows in response to a political or economic shock has proven to be the undoing of many an economy in the past, particularly emerging market economies.
However, Robin Brooks at Goldman Sachs says there is a risk in assuming the UK is about to suffer a shock akin to those felt by emerging markets when an adverse shock is felt.
The distinction with emerging markets is important.
“Emerging markets often have large current account deficits, much like the UK,” says Brooks, “capital inflows then halt abruptly or even reverse on an adverse shock, a ‘sudden stop,’ and exchange rates tumble.”
This is not what is going on in the UK though, Brooks argues.
“In the wake of the Brexit vote, markets are functioning normally, capital is flowing in as well as out of the UK, and global risk markets are looking through what is a relatively minor shock for the global economy,” says Brooks.
The repercussions of recent events for the Pound are therefore not to be found in emerging market “sudden stops,” but in the calmer realm of G10 growth shocks, where effects can still be sizeable, but nowhere near as large as “sudden stops.”
Pound at Oversold Levels
So think growth shock, not “sudden stop,” and resist the temptation to extrapolate from emerging markets to the UK.
Despite the balanced tone on investor inflows, Goldman Sachs have nevertheless joined peers in cutting their GBP forecasts.
“This is why our 3-month forecast for EUR/GBP allows for some modest further weakening in Sterling, with the cross going to 0.85, but on a 12-month view we expect normalisation, with EUR/GBP reverting to 0.78,” says Brooks.
As a result of expected Sterling weakness, Goldman have upped their
EUR/GBP forecasts to 0.85, 0.82 and 0.78 in 3, 6 and 12 months, from 0.76, 0.74 and 0.70 previously.
In pound to euro exchange rate terms this equates to 1.1765, 1.2195 and 1.2821 from a previous 1.32, 1.35 and 1.43.
This would suggest that by Goldman's estimations Sterling is already potentially sold against its European rival.
Many analysts will readily point out that currency's often exceed their levels of fair value, particularly in times of heightened volatilty.
Therefore while the forecast targets are a good guide over longer time frames, they offer little guidance in markets such as the one we are witnessing.
Morgan Stanley Advocate Chasing the Euro Higher
Strategists at Morgan Stanley meanwhile say traders should look to aggressively chase the EUR/GBP rate higher.
Morgan Stanley's Hans Redeker argues Eurozone-based investors are finding few investment returns outside of EMU, limiting the outflows needed to counterbalance EUR inflows from the current account surplus.
Banks are reducing foreign lending as they have to keep balance sheets constrained.
"We don't see who would be a EUR seller given that corporate EUR long positioning is relatively low, despite the rising current account surplus," says Redeker.
Morgan Stanley are positioned via long EURGBP and would look to add further EUR longs in coming months.
Redeker and his team are looking to achieve a target of 0.88 on the trade, this equates to a fall in GBP/EUR to 1.1364 in GBP/EUR.