ABN Amro Upgrade British Pound + UK GDP Forecasts, Sterling Seen Ending Year Higher Against Euro and US Dollar

ABN Amro upgraded their forecast targets on GBP/EUR and GBP/USD while also nudging up their forecasts for the UK economy and saying they believe the Bank of England will not cut interest rates again in 2016.

• Pound to Euro exchange rate today (23-9-16): 1.1620, Month-to-date best rate: 1.1942
• The Euro to Pound Sterling exchange rate today: 0.8606, Month-to-date best rate: 0.8614

Dutch bank ABN Amro have this week told clients they are upping their forecast targets on both GBP/USD and GBP/EUR.

Economists have also nudged up their forecasts for the UK economy.

ABN Amro’s decision to raise their forecasts were the result of stronger than expected economic data being delivered by the UK economy.

“The improved outlook on the economy and the fact that we no longer expect a Bank of England interest rate cut meant that we made significant upward revisions to our Sterling view,” says analyst Georgette Boele at ABN Amro in Amsterdam.

The call on interest rates may have credence as we have since heard from Bank of England MPC member Kirstin Forbes that, in her view, another cut is not warranted.

Forbes told an audience at Imperial College, London, that the impact on the economy of the June 23rd EU referendum had been "less stormy" than had been anticipated.

As such Forbes is, "note yet convinced", that further rate cuts are warranted.

A shift in trader sentiment towards the UK currency is also expected by ABN Amro to provide support going forward.

The latest Commitment of Traders report (futures market) show that speculators partially cut back net short Sterling positions.

However, these net short positions are still extremely large and still show one of the largest short positions since these data were introduced in the early nineties.

What does this mean?

Boele explains:

“First of all, speculators have become somewhat less bearish on sterling.

“Second, they remain cautious and are not convinced yet that the UK economy and sterling have turned the corner. With positions being this substantial, other positive surprises in UK macro-economic data will likely result in an enormous squeeze of these net-short sterling positions.”

Such moves are likely to aid a recovery in Sterling.

Latest Pound/Euro Exchange Rates

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“Our year-end forecasts for EUR/GBP and GBP/USD are 0.83 and 1.33, respectively. The risk is tilted towards the upside in sterling,” says Boele.

The previous forecast for EUR/GBP was at 0.92.

EUR/GBP at 0.83 equates to GBP/EUR at 1.2048 and EUR/GBP at 0.92 equates to BP/EUR at 1.0870.

EUR/GBP is now seen at 0.79 at year-end 2017 down from 0.81 previously, this equates to 1.2658 up from 1.2346 previously.

The move to upgrade forecast targets for GBP follows a similar move made by the world’s largest investment bank, JP Morgan, as reported last week.

ABN Amro now sit alongside the likes of Lloyds Bank in anticipating a higher GBP/EUR over coming months.

UK Economic Upgrades, No Bank of England Rate Cut in November

ABN Amro also anticipate a better growth profile for the UK economy following recent stronger than expected economic data.

In the aftermath of the UK’s vote to Brexit ABN Amro downgraded their forecast to incorporate a moderate recession.

Recent survey evidence suggests the economy is holding up better than expected and has instead settled into a modest growth trajectory.

"It could be that the uncertainty shock that we expected is less severe because the actual Brexit looks like such a distant prospect, it may not happen until 2020," says a note from ABN Amro's economics team.

Of course the adverse effects could come at a later point depending on the trade negotiations and the path of growth is in any case lower than expected before the vote.

Indeed, this is the view held by world-renowned economist Paul Krugman who has berated economists for warning that the Brexit vote would inspire a recession.

Krugman argues that the economic impact of Brexit would be felt by a lower longer-term growth average.

Overall, ABN Amro have revised their 2016 and 2017 UK GDP forecasts up to 1.9% and 1.3%, respectively, from 1.5% and 0.5% previously.

Given that the BoE is factoring growth close to our previous scenario (0.7% for 2017), they are also no longer expect another interest rate cut - a stance which appears to go against what many other institutional investors are expecting.

OECD Adjust Higher Growth Forecasts for UK Economy

The big news of the week on the economic forecasting front does however come from the OECD who have upgraded their GDP forecasts.

The OECD were particularly agressive in their downgrades to UK, and indeed global, growth should Brexit occur.

Following the vote confidence has not slumped, the Bank of England has been proactive, financial markets functioned well and global economic data continues to show growth.

Growth is forecast to be set at 1.8% for 2016, up 0.1% from the OECD's pre-referendum estimate.

However, GDP is projected to slow to 1% in 2017, well below the pace in recent years and forecasts prior to the referendum.

Therefore while the OECD acknowledge there was no shock from Brexit, they see slower growth in coming years.