Sell the Pound on the Rebound say Natixis Strategists

Foreign exchange analysts at one of France’s leading financial services providers have told clients betting against the Pound remains a preferred strategy.

In a note to clients released on February 13, analysts at Natixis - part of Groupe BPCE - say they see value in “selling the Pound on the rebound”.

The catalyst for an expected weakening is Sterling’s familiar foe - Brexit.

While we note that pressures associated with Brexit have faded, markets and analysts alike remain sceptical that recent resillience can be maintained. 

Foreign exchange analysts at Natixis note 1-month implied volatility for the EUR/GBP exchange rate has continued to rise, reaching 10.50%, after the House of Commons passed the bill authorising the government to trigger Article 50 of the Lisbon Treaty.

The bill will now go before the House of Lords in coming weeks.

“Although British GDP growth remains solid as yet, uncertainties over the upcoming negotiations with the European Union remain significant, especially given the surge in euroscepticism, timed when there will be a number of key elections. For these reasons, we are cautious as regards the growth outlook for the UK over the medium term, with the risk that stagflation will take hold,” say Natixis.

The Bank of England recently upgraded its forecasts for the UK economy in 2017 saying they now see annualised growth running at 2% in this year.

If correct, this would mark a second year of outperformance for the UK economy when compared to its major rivals.

Indeed, based on the strength of the economy’s growth rate when combined with expectations for rising inflation some have argued that UK interest rates are too low.

Suggestions that interest rates are too low simultaneously implies the Pound is too low as the currency traditionally tracks moves in interest rates.

Yet, the uncertainty over Brexit justifies any under-valuaion argue Natixis:

“We remain cautious on sterling, as we see the GBP/USD correcting towards 1.18 in coming months, while we expect the EUR/GBP to fluctuate between 0.848 and 0.86 in the very near term.”

From a Pound into Euro perspective 0.848 = 1.1792 and 0.86 = 1.1628.

Euro to Strengthen in 2017

Economic data from the Eurozone were weak on Tuesday February 14 with Eurozone GDP grew in Q4 by 0.4% instead of 0.5% estimated by economists.

The disappointment comes as German GDP missed the mark having risen 0.4% instead of 0.5% expected by analysts.

Industrial production fell 1.6% in December versus a fall of 1.4% expected.

The impact on the Euro was however limited as the latest growth data pertained to the last quarter of 2016 while more recent survey data for 2017 have been reassuring.

And this should prove positive for the Euro going forward as it could prompt expectations for the Eurozone to withdraw its Euro-negative stimulus programmes, most notably its quantitative easing efforts that see it purchase vast amounts of corporate and government debt every month.

“The ECB has resisted calls to tighten its policy. But if incoming data continues to improve as we expect then tapering talks should come back to the forefront, potentially causing the Euro to surge higher,” says Fawad Razaqzada at Forex.com.

The Euro continues to struggle amidst concerns of an electoral upset in the Eurozone in 2017 with the major economies heading for the polls.

But, event this may not be enough to dent the Euro argues Razaqzada:

“We are heading into a period of uncertainty in the Eurozone due to the upcoming elections in Germany, France and the Netherlands. But if the US election is anything to go by, the rise of right-wing politics in the Eurozone may not necessary mean that the Euro would weaken.”