The GBP/USD pair is expected to remain above 1.2000 say analysts at Société Générale as markets appear to be correctly pricing in future interest rate expectations.
SocGen argues 3-month currency forward contracts are reflecting a “consensus now that fed funds will be at 1-1.25% in December 2017, while UK rates will be unchanged at 0.25%.
“This is in line with our forecasts and points to a period of relative calm for the pound (which is currently seeing some much-needed short-covering) before the economic implications of leaving the EU become clearer,” says SocGen.
During this period of ‘calm’ for the Pound the French lender advocates fading short-covering rallies.
A major risk to its forecast is that hyperinflation in the UK due to the weak pound could cut down household disposable income to such an extent that it could result in a fall in consumer spending and a major economic slowdown.
This could result in a risk of a spike lower to 1.15 before recovering back up to above the 1.2000s.
When it is finally triggered, Brexit will hurt the economy, says SocGen.
This will not necessarily happen in Q1 if economic data continues to come out positive, but things could change in Q2 when Brexit downside starts to take its toll, and along with Q3 this period could result in downside for the Pound.
During the same period, the Euro is expected to ‘bottom’, perhaps at parity with the Dollar, and then start to recover as the European Central Bank (ECB) eases back on its monetary stimulus accelerator.
If there is talk of the ECB tapering in H2 2017 that would result in a surge higher in the Euro and this combined with GBP weakness results in SocGen’s call to buy EUR/GBP in Q2 when they see that, “a return to levels above EUR/GBP 0.90 is very possible in 2017.”