Pound Sterling will resume its slide against the Euro in 2017 say forecasters at HSBC.
Germany and Spain are tipped to lead a continued Eurozone recovery whilst Sterling is undermined by the triggering of article 50 and Brexit uncertainties finally become manifest.
German growth is based on more generous benefits and Spanish on a tourism boom and export growth.
Indeed, the strengthening Eurozone will likely prompt the European Central Bank (ECB) to bring forward it’s timeline for ending its quantitative easing programme.
It is this programme, that sees the Bank buy Eurozone debt, that has largely been responsible for the Euro's multi-year weakness.
With the programme running towards the end of its life the Euro should be free to recover.
In December, the ECB announced an extension to its quantitative easing programme until the end of 2017, from a previous end-date in March 2017.
HSBC see the “hurdle” to a further extension beyond the present end date as high, due to “political pressures”.
HSBC’s Chief European Economist Simon Wells believes the ECB extended quantitative easing so as to “sidestep” potentially difficult discussions and provide a “safety net” for the European sovereign bond market during the politically sensitive elections in 2017.
However, any further extensions could meet opposition from hawkish policy makers, particularly in Germany so are unlikely.
The expected winding down of policy in H2 2017 is, therefore, likely to stimulate demand for the Euro as interest rates rise.
As such, HSBC are forecasting the EUR/GBP exchange rate to reach parity by the end of 2017.
If you are unable to accept such a low exchange rate for GBP into EUR international payments in 2017 we suggest you book in current rates. Likewise, if you want to take advantage of a stronger Euro we suggest you set an order for better rates.
Pound Sterling to Keep Falling
The main risk to the British Pound in 2017 is the impact of Brexit negotiations which are expected to commence once the Government triggers Article 50 of the Lisbon treaty, most likely in March.
The forecasts come as the UK looks to actually have enjoyed a stronger second-half to the year than it did in the first-half.
HSBC warn the impact from Brexit will come, but the impact is delayed. “We still see a meaningful Brexit impact on the economy. Rather than starting in H2 2016, it comes a bit later, in 2017. But the difference is largely in timing, not magnitude,” said HSBC’s UK Economist, Liz Martins.
“As before, we see a fall in business investment.
“Uncertainty levels are likely to rise when Article 50 is triggered, we presume in Q1 2017 or very soon after, and details begin to emerge of the reality of what price the UK’s businesses may have to pay for Brexit – whether in terms of access to the single market, tariffs, non-tariff barriers, or restricted access to migrant labour.
“Clearly, the impact comes in later than we initially expected."
Built on Sand
The steep rise in recent levels of private credit and indebtedness are another worrying sign for the UK argues Martins.
The analyst observes that people are not scaling back and ‘cutting their cloth’, but rather borrowing more.
“In addition, we find it somewhat concerning that the UK has not, so far, taken the rebalancing opportunity offered by the weaker currency. With higher prices not yet having been passed onto consumers, the UK seems to have doubled down on its old habits of borrowing and spending, rather than scaling back, keeping the savings rate low and the current account deficit wide,” says Martins.
Inflation to Undermine Consumer Confidence
Higher inflation from a weak Pound will increase the cost of imports.
Sterling has fallen ~15% since the June referendum and this has understandably put upward pressure on imports which should slowly feed through to the shop shelf.
Whether passed on by businesses or not, it is likely to have a deleterious effect on the economy.
If absorbed by companies, as currently seems to be the case, it may inhibit their expansion, investment, and hiring; and if passed on to the consumer it will reduce consumption or reduce saving and increase unsustainable borrowing.
Martins, therefore, sees a risk the Bank of England (BOE) may need to step in and print money to artificially keep borrowing costs low and stimulate growth.
Any hint that the Bank is likely to cut rates or increase quantitative easing will certainly spark another leg lower in Sterling.
The EUR/GBP exchange rate is set to rise from its current level of 0.8567 to a 0.8600 in Q1 of 2017, 0.91 by the end of Q2, 0.96 by the end of Q3, and parity by the end of Q4 2017.
From a GBP/EUR perspective this equates to 1.1628 in Q1, 1.11 by Q2, 1.04 by Q3 and 1.0 by year-end.
For the GBP forecast table, please see below: