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Crédit Agricole "Constructive" on Pound Sterling for Remainder of 2022

  • Forecasts show GBP upside
  • As Brits dip into savings pool
  • And economy continues to recover from Covid

Pound Sterling forecasts

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Foreign exchange strategists at Crédit Agricole retain a "relatively constructive" view on the British Pound for the rest of 2022, expecting UK consumers to dip into their large stockpile of savings to weather the negative impact of the country's surging inflation levels.

The call comes as the Pound records gains against most of its peers in the first full week of April, which is traditionally a positive month for the currency.

But the Pound remains a relative laggard when viewed over a one-month timeframe and for 2022 as a whole gains are only recorded against the Yen, Euro and Krona.

This underperformance is linked in part to the war in Ukraine which has impacted significantly on European economies which are particularly exposed to surging energy prices.

"The GBP remains close to recent lows as investors continue to see the currency as a useful stagflation and risk aversion hedge," says Valentin Marinov, Head of FX Strategy at Crédit Agricole.

UK inflation is forecast by the Office for Budget Responsibility to average 7.4% this year with the peak being at 9.0% in April.

A lift to energy bills this April, ongoing global supply chain pressures and elevated commodity prices means UK consumers will face intense pressures over coming months, limiting the economy's ability to bounce back from the effects of two years of Covid.

The Bank of England raised interest rates for a third time in March but warned they were concerned about the country's growth prospects, prompting some investor caution towards the Pound. (Set yourself a rate alert, here).

"An important contributing factor to the currency underperformance in recent weeks has been the apparent loss of rate advantage across the board. In turn, this seemed to be a direct consequence of the 'dovish' BoE rate hike last month and the cautious economic assessment," says Marinov.

But Crédit Agricole's FX strategists also see some positives for the economy and its currency that should be in play for 2022.

These include expectations for the UK economy to outperform this year, with the consensus market expectation for UK GDP growth in 2022 being second only to that for the G10 energy exporter bloc of Australia, Canada and Norway.

Marinov says "this comfortably exceeds the growth expectations for the Eurozone, the US and Japan".

He cites the Bank of England in saying UK households can rely on approximately £200BN of excess savings amassed during the pandemic to help provide a cushion against the damaging consequences of the cost of living crisis.

"In addition, the UK has now almost fully reopened its economy and its huge services sector stands to benefit as the number of Covid infections starts falling again into the summer months," says Marinov.

GBP undervalued relative to other currencies

Above: "The GBP looks undervalued relative to VALFeX and PPP" - Crédit Agricole. Image: Crédit Agricole CIB, Bloomberg.

The UK economy suffered one of the largest economic slumps amongst developed nations during the Covid pandemic owing to the significant size of the country's services sector.

The sector accounts for over 80% of UK economic output and lockdowns therefore proved particularly devastating.

But it stands that the economy would be amongst those that recover fastest when restrictions are fully lifted.

"Assuming that the geopolitical and, therefore, stagflation risks also start abating in the coming months, we maintain a relatively constructive outlook on the GBP from current levels," says Marinov.

The Pound to Euro exchange rate peaked at 1.2190 on March 07 during a period of intense anxiety relating to Russia's invasion of Ukraine and has since favoured a range between 1.2050 and 1.1850.

The Pound to Dollar exchange rate remains under pressure - as do most currencies against the USD - flirting with the 1.30 level.

But, "with many negatives in the price of the oversold GBP, we further believe that a cautious recovery could be on the cards for the currency in response to potential positive data surprises," says Marinov.

Crédit Agricole forecast Pound-Dollar at 1.38 by year-end and hold a Euro-Pound forecast of 0.83. This gives a Pound-Euro forecast of 1.2050.