The mood music behind the pound to euro exchange rate (GBP/EUR) remains overwhelmingly negative as yet another analyst slashes their forecast targets.
UniCredit's Global Head of FX Strategy, Dr. Vaseileios Gkionakis, has slashed his Sterling forecasts citing "multiple layers of fear" on the future UK relationship with the EU.
This fear factor should be enough to send GBP-USD to 1.20 and EUR-GBP to 0.93 by year-end Gkionakis argues.
An Euro to Pound Sterling exchange rate of 0.93 translates into a Pound to Euro exchange rate of 1.0752.
"EUR-GBP should rise substantially, by 12%, to a peak of 0.93 by end-2016 – 18% higher than our initial forecast (0.79)," says Gkionakis.
UniCredit's "very bearish view on Sterling" over the next six-to-nine months is predicated on an abrupt reversal of portfolio flows as a consequence of the Brexit referendum result, which should be amplified further by the very high probability of an UK recession.
The UK is highly reliant on foreign exchange inflows from overseas investors to keep the currency at the valuations we have been familiar with over recent years.
Indeed, the end of June saw the release of the latest current account data which confirmed a £32.6BN deficit confirming the country remains heavily reliant on foreign exchange inflows from investors.
We reported that this inbalance on the current account promises a "notably weaker" British Pound over coming months.
Analysts at UniCredit agree.
However, how low can the pound go before it attracts massive bargain hunting demand? After all this is the world's fifth largest economy we are talking about here.
UniCredit believe that questions of valuation will ultimately ensure demand for Sterling picks up and in 2017 the currency is likely to start reversing some of its losses against the USD with analysts seeing GBP/USD at 1.28 by end-2017.
The Pound should also stabilise against the Euro and analysts estimate EUR/GBP at 0.90 by end-2017, or GBP/EUR at 1.11.
This is hardly a stellar recovery and still well below the levels we are seeing today.
"This should create some buying opportunities as the GBP’s undervaluation by that time would have become too stretched," says Gkionakis.
Long-Term Uptrend Still Alive
With the wild movement we have seen in the Pound / Euro exchange rate over the last couple of months, you have to take a very long term look at the charts to see what the pattern looks like.
It is interesting to note that, technically at least, GBP/EUR is still pointed higher with the recovery from the lows registered in the wake of the 2008 financial crisis still being in play.
"In fact this exchange rate has been in a slow upward trend since the worst of the financial crash in 2008. That took this rate from €1.01 in 2008 to €1.44 in 2015 and there have been a few dips in the meantime," says David Johnson at Halo Financial, the foreign exchange brokerage.
The support for the Pound is arraigned along a trendline that now sits at €1.1930 and that is precisely sterling was seen at the close of the previous week:
Now that the decision has been made to leave the EU, Britain has to get a new Prime Minister in place and start the arduous task of negotiating an exit.
It is made easier by the fact that Europe needs the UK as an export destination but made harder by the EU's need to deter any other exiteers from making waves.
"There are undoubtedly troubled times ahead but the UK is still the 5th largest economy in the world and nothing will fundamentally change for 30 months or so. Meanwhile, you can expect a lot of volatility and great opportunities for buyers and sellers alike," says Johnson.
Carney Prompts Acceleration in GBP's Decline
The pound weakened towards April 2014 lows in the previous week after the Governor of the Bank of England (BOE) Mark Carney said he believed it appropriate that the BoE should introduce new monetary easing measures.
Carney suggested the measures were necessary to shield the UK economy from any negative impact associated with the UK's decision to exit the European Union.
Achieving 'monetary easing' is best done through cutting interest rates and expanding the asset purchase facility, otherwise known as quantitative easing.
Both programmes seek to increase the amount of capital flowing in the economy which, it is hoped, should aid companies invest in growth.
A side effect of this increase in money is a weaker currency.
The previous period of rate cuts and quantitative easing, in response to the 2008 global financial crisis and ensuing recession, saw a significant devaluation of the pound.
The new round of monetary easing could be in place by August as Governor Carney did say he saw it appropriate that the moves were conducted over the summer.
Combined with the sheer uncertainty posed by the UK's vote to leave the European Union the fundamental backdrop is one that favours further Sterling downside.
But what target levels should those with an interest in the market be watching?
But, Euro Exposed to Potential Brexit Contagion
There is however a big unknown when it comes to forecasting the GBP/EUR, and that is to what extend will the Euro suffer Brexit contagion?
Many analysts argue the currency remains vulnerable to the more negative stories suggesting a break up of the EU, something that could limit downside, or even aid a recovery in GBP/EUR, depending on who you listen to.
According to FX strategist Pierre Carlsson of Scandinavian lender Handelsbanken, the euro will likely suffer on Brexit:
“We believe that when Brexit becomes a reality, the Euro will suffer. If by some miracle, it is at all possible for the UK to readdress the decision, the Pound would strengthen considerably. So although we think that the pound will continue to be weak, we see good chances of a lower EUR/GBP in the coming months.
A more detailed account of Carlsson's thinking can be found here.
However, whether this starts to impact in the week ahead is debatable, rather this is a longer-term theme we believe.
Morgan Stanley’s Hans Redeker, is more positive about the short-term outlook for the euro, suggesting it will be supported as Eurozone financial institutions repatriate funds and assets from abroad, due to the pressure some are facing following Brexit.
He further suggests there is limited scope for Euro sovereign bond yields to fall any deeper into negative territory due to growth fears and ECB stimulus increases, limiting downside for the currency.
Finally, the Euro should find some support as Eurozone investors are less likely to invest abroad since the outlook for returns looks subdued globally.
Data and Events to Watch in the Week Ahead for GBP
Data on Friday showed an unexpected rise in manufacturing activity in June for the UK economy, however this failed to support a recovery in pound as most of the data was gathered before the Brexit watershed on the 23rd.
In the week ahead Construction PMI on Monday and Services PMI for June on Tuesday - will complete the picture of activity in June, with both expected to show slow-downs.
The upcoming UK data will likely signal the beginning of the Brexit-induced slowdown.
However, it must be remember that it could take two years for the UK to exit the European Union, therefore, "an uneasy calm may return to the markets as investors realise that the post-Brexit political vacuum may keep the market status quo little changed over the summer," says Valentin Marinov, Head of G10 FX Strategy at Credit Agricole.
Marinov believes GBP will not hit new lows just yet, "we also cannot exclude a further short squeeze but doubt that investors will discount the Brexit risk to such a degree as to adopt a constructive view on GBP."