Image © European Union 2018 - European Parliament, Reproduced Under CC Licensing.
- Brexit won't be a cataclysm for Sterling
- Difference between 'no deal' and negotiated Brexit actually marginal
- Pound-to-Euro exchange rate @ 1.444 today, Pound-to-Dollar rate @ 1.3052
Pound Sterling is a "buy on dips" candidate which is undervalued because the market is over-estimating the negative consequences of Brexit, according to Peter Gambles, co-founder and managing partner of advisory service MBMG Group.
Gambles views Brexit as a "soap opera" which is unlikely to result in any meaningful deterioration in the U.K. economy, even in the event of a 'hard Brexit'.
"Frankly, the difference between a soft-Brexit and even a no-deal Brexit is far more marginal than most of the scare stories that you read out there," says Gambles.
"If you look at the really independent analysis, actually Brexit doesn't make that much difference, whatever form it takes it doesn't make much difference," adds the MBMG managing partner, who says he is actively buying the currency on dips.
"The thing with soap operas is they keep having to produce new episodes every week so we are going to keep getting Brexit stories every week," he adds.
This suggests a continued rocky ride for the Pound, but ultimately an upside skew if Gambles is right and the market it completely misjudging the impact of Brexit on the economy.
The Pound is a buy as MBMG Group believe GBP/USD should be at 1.35-1.40, not the current 1.30 which in turn implies upside in the GBP/EUR exchange rate provided EUR/USD is assumed as constant.
Gambles dismisses the extent to which Brexit has been responsible for the fall in UK GDP growth momentum, estimated by Bloomberg at 2.0% of GDP.
"You have to disaggregate those (GDP) numbers," he says, "at the moment anything that happens anywhere in the world, the British press are blaming it on Brexit."
Nevertheless, Brexit has been a massive distraction which is affecting business and the markets away from the business of the day, so it probably has cost the economy simply due to that.
"When we get there and Brexit is over, whatever form it takes things will return to normality. the UK operated an economy before the EU and the EU operated quite happily before the UK joined it," says Gambles.
"It is not going to be some sort of cataclysm, it is not a life-changing event," he adds.
This bening view on Brexit is not unique to MBMG Group.
We reported recently that strategists at global investment bank ANZ reckon that a 'no deal' might not be the cataclysm for Sterling that other analysts are expecting, and therefore the downside risks posed by a 'no deal' Brexit are not as great as many in the market believe.
"Without a breakthrough, Sterling is vulnerable in the near-term, but recent price action indicates that investors may be less pessimistic about a 'no deal'," says Brian Martin, Head of Global Economics with ANZ in London.
This view contrasts to consensus expectations amongst analysts that a 'no deal' Brexit poses significant downside to the value of the Pound.
"If it were to happen, our FX strategists argue that a combination of heightened uncertainty and prospective adjustment could precipitate a 10% nominal Sterling depreciation in the first six months," says Adrian Paul, a foreign exchange strategist with Goldman Sachs in London.
The Pound-to-Euro exchange rate is meanwhile forecast by UBS to trade at 0.88 in 2019 in the event of a hard 'no deal' Brexit - that is well below parity. Today, the exchange rate is quoted at 1.12; this 'doomsday' scenario implies a 20% decline in value within the space of a year.
A Deal Remains Base-Case Scenario, Sterling Near Multi-Week Highs
The call by MBMG Group comes as Sterling holds onto recent gains made on the back of growing expectations for a deal to be reached between the E.U. and U.K. before year-end, owing to the clear political will for such an outcome being shown by both the U.K. and E.U.
Negotiations between the E.U. and U.K. are said to be proceeding at a frantic pace, driven by the U.K. government's belief that if a withdrawal agreement is not secured by November a 'no deal' Brexit becomes probable as the prospect of squeezing any Brexit legislation through parliament narrows.
“We don’t want 'no deal'. But because of the parliamentary timetable it becomes very hard to avoid if talks continue past this month” a senior member of the government tells Robert Peston, ITV's Politics Editor. “And that is why negotiation have massively shifted up a gear, with officials working through the night”.
According to Peston, the important dates are Tuesday, November 06, when the prime minister briefs her cabinet on the likely shape of a deal, and Monday, November 12, which is the probable cut-off day for organising an emergency Brexit council of E.U. leaders.
Bank-beating GBP exchange rates: Get up to 5% more foreign exchange by using a specialist provider to get closer to the real market rate and avoid the gaping spreads charged by your bank when providing currency. Learn more here