BNP Paribas, ANZ see British Pound Recovery

Above: Sunday Business Secretary Greg Clark helps Sterling start the new week on a firm footing.

Pound Sterling is firm at the start of November as a leading investment bank says we should position for the nascent recovery to extend.

• Pound to Euro exchange rate today (1-11-16): 1.1168, day's best rate: 1.1170
• Euro to Pound Sterling exchange rate: 0.8954, day's best rate: 0.8981
• Pound to Dollar exchange rate today: 1.2266, day's best rate: 1.2267

A busy week for Sterling started off with the rumour mill surrounding the future of the Bank of England's Governor Mark Carney finally being shut down as Carney committed to staying on at the Bank until 2019.

This leant some support to the unit which remains highly sensitive to headlines, technical drivers and external global developments as opposed to domestic data releases.

However, eyes will be back on Carney and his team on Thursday when the question of further interest rate cuts are dealt with in the November policy decision and Quarterly Inflation Report.

According to economists at BNP Pariibas, better-than-expected growth and a weak currency are likely to mean the Bank of England will not announce more easing at its monetary policy meeting on Thursday.

Analysts at the BNP Paribas believe this is one reason why Sterling could strengthen on the event.

There are other reasons to back the Pound argue BNP Paribas. 

Over the past week, GBP/USD slid to its lowest levels since the UK referendum (1.21) after the UK’s Chancellor of the Exchequer Philip Hammond warned that political considerations in Europe could force a tough deal with the UK.

This confirms the currency remains highly sensitive to headlines surrounding Brexit.

But, BNP Paribas reckon the risks are now skewed to the upside.

"We think it is now time to position for a medium-term GBP rebound as a hard-Brexit scenario is largely priced in. We recommended a six-month call GBP/USD call spread last week, looking for a long-term recovery from what we
view as very cheap levels," says Clara Leonard at BNP Paribas.

BNP Paribas also see scope for a shorter-term squeeze higher, given stretched short positioning.

Latest Pound/Euro Exchange Rates

	Live: 1.1449▲ + 0.05% 12 Month Best: 1.2162
*Your Bank's Retail Rate	1.106 - 1.1106
**Independent Specialist	1.1289 - 1.1335 Find out why this is a better rate

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

Others agree that the downside pressures on the Pound are fading.

ANZ's FX research team expect Sterling to maintain recent ranges heading into Thursday’s policy announcement at the Bank of England.

Analysts at the Australian bank argue that what shouldn’t be overlooked is that the economy is performing quite well for the time being:

The housing market has perked up, the 3m/3m trend in retail sales shows upward momentum in consumption (September +1.8%), the labour market is holding up well, and inflation is showing signs of accelerating.

“The rule of thumb is that every 10% drop in the exchange rate raises CPI inflation by around 1.75% over two years,” say analysts at ANZ in a briefing to clients.

ANZ’s expectation is that the BoE will probably upgrade its assessment of growth and inflation in the November inflation report.

This should support Sterling.

Meanwhile, they believe the autumn statement on fiscal policy is likely to be expansionary and push out the timing of when a balanced budget will be achieved whilst also providing some current fiscal stimulus.

While it is impossible to quantify the appropriate risk premium for Sterling and major questions overhang longer-run growth, in the short run sterling may have adjusted sufficiently.

ANZ targets GBP/USD at 1.22 and EUR/GBP at 0.88 by year-end which translates into 1.1363 GBP/EUR.

Is the UK Government Aiming for a 'Softish' Brexit?

Sterling will remain highly sensitive to headlines surrounding Brexit over coming days and weeks.

Recent news has been good with Business Secretary Greg Clark telling the Andrew Marr show:

“Of course if there were tariffs in a market which is very international – there’s a lot of trade from the continent of Europe to the UK so the supply chain is integrated.

“So one of the assurances I was able to give is that our intention, our negotiating remit when it comes to the discussions with our European partners, is to have a constructive and civilised dialogue to look for the common interest.

“So what I said is that our objective would be to ensure that we have continued access to the markets in Europe and vice-versa without tariffs and without bureaucratic impediments. And that is how we will approach those negotiations”.

The comments were made in relation to assurances given by the Government to Nissan who this week announced they were going ahead and manufacturing two new models at their Sunderland plant.

The Pound remains highly sensitive to Brexit-related headlines, particularly those pertaining to a so-called hard-Brexit.

There is a chance that markets take Clark’s words as confirmation that the UK will seek out a business-friendly settlement to the impending negotiations and the downside pressures on the currency posed by hard-Brexit start to fade.