GBP/USD: 1.40 Low-Point Ahead of Recovery
Banca Intesa SanPaolo forecast GBP/USD to hit a low of 1.4000 in one month's time before starting a long recovery back up to the 1.50's by the summer.
Italian lender Intesa SanPaulo S.p.a has added its voice to a growing chorus of banks who have down-graded their forecasts for sterling.
Referencing a fall in inflation expectations due not only to a decline in “oil quotations,” but also because of “a weak trend in domestic prices,” and in particular weak wage growth, the bank’s new forecast predicts GBP/USD will fall to 1.4000 in 1 months’ time, when it had previously expected it to fall to 1.4300 – a level which has already been breached in trading on Friday, with the exchange rate currently at 1.4168 at the time of writing.
Intesa only see the current bout of weakness as temporary, however, as they expect GBP/USD to rise to 1.4800 in the next three months, as opposed to the 1.5200 in its initial forecast.
In six months’ time the bank forecasts GBP/USD to break back up above the 1.5000 handle, and reach 1.5500, a downward revision from the 1.5800 projected previously, but still a substantial rise from the current level close to 1.4000.
Latest Pound / US Dollar Exchange Rates
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This recovery forecast comes on the back of expectations of a gradual recovery in growth and the BOE’s own admission that “barring further negative developments, the initial bank rate hike could come this year.”
Indeed employment data out on Wedensday, which saw the Unemployment Rate unexpectedly fall to 5.1% and Wages Including Bonuses fall by a less then expected 1 basis point provided temporary support to sterling and showed upside potential in the mid-term outlook.
The Italian bank also argues that the further fall in oil prices could actually support a recovery in, “private consumption over time, not only in the United Kingdom, but within the borders of its main trade partners as well.
“Lastly, it (the BOE) remarked that the recent depreciation of the pound could offset at least in part, the downside pressures to inflation exerted by the drop in energy prices and by weak wage growth.”
So the weaker pound could act as a springboard for higher inflation.
Intesa see Brexit concerns as well as slower growth as the two most significant downside risks to their mid-term bullish forecasts.
Interestingly, the bank sees upside limited for the euro against the pound, with its forecasts for EUR/GBP to fall to 0.75 in one month, 0.71 in three and 0.69 in six, from 0.73, 0.70 and 0.68 previously.
Intesa is one of several banks who have had to cut their 2016 forecasts for sterling.
J P Morgan also cut its forecasts recently, citing Brexit fears as a major contributing factor.
Whilst the banks “high-frequency models” indicated Brexit is now priced in, they nevertheless see a possibility of yet more weakening as a result of “non-resident corporate and investor hedging.”
Credit Suisse also slashed their forecasts – some by over 8.0% due to an increased chance of a referendum on E.U membership in 2016, as well as a double-whammy of emerging market slow-down and continued weakness in the economy of its largest trading partner, the Eurozone.
