Pound Sterling has received the backing of one of the UK's most prominent financial services institutions who have written to clients saying they see the currency embarking on a recovery against both the Euro and Dollar.
The call comes a matter of days before the UK enters one of its most important negotiations of recent history with the UK Government expect to trigger Article 50 of the Lisbon Treaty on Wednesday, March 29
The outcome of these negotiations hold significant implications for the UK’s future trading relationship with Europe which will in turn impact on how attractive the economy is for international investors.
For the Pound, many readers have been asking us whether the trigger of Article 50 will prompt another slip in the currency’s value.
“We expect the triggering of Article 50 to initiate a ‘sell the rumour, buy the fact’ rebound in GBP from historic undervaluation as ambiguity over Brexit recedes,” says Marvin Barth, a foreign exchange analyst with Barclays bank in London.
This echoes our view published here that each step forward in Brexit negotiations brings with it welcome clarity that is ultimately good for Sterling.
The Barclays call comes in their report entitled ‘FX Views for the Year Ahead’, dated March 23.
Sterling’s exchange rate value has been depressed to historic levels by a combination of extreme ambiguity that Brexit presents.
Barclays join those analysts who believe the Pound’s current valuations represent the markets’ “overestimation of the downside to GBP resulting from Brexit.”
Sterling’s recent decline was clearly prompted by the referendum result of June 23.
According to Ben Broadbent, Deputy Governor of the Bank of England, it seems likely that the foreign exchange market has decided the consequences are negative.
According to Broadbent, the most plausible explanation for the depreciation is that, in the eyes of the market, leaving the EU will make exporting harder and more costly. To help compensate the currency needs to be cheaper.
“If the currency market is right the UK’s future trading relationships will be less favourable; if it’s too pessimistic sterling is likely to rebound,” says Broadbent, in an address to an audience at Imperial College, London.
As can be seen above, the Pound is well below where it should be relative to domestic demand and is therefore arguably overvalued.
Barclays believe the Pound is likely to rise back to ‘fair-value’.
“While the drivers of GBP’s rebound largely are medium term in nature – Purchasing Power Parity valuation, long-term equilibrium value, and drawn-out negotiations – so were the factors that led to its sharp depreciation,” says Barth.
Barclays expect falling uncertainty and a confluence of short-horizon factors – investor positioning, corporate hedging and risks to the monetary policy outlook – to accelerate a rebound in GBP.
Euro to be Challenged
With regards to the Euro side of the GBP/EUR equation, Barclays believe the currency's outlook is much improved and it is therefore "close to a turning point amid accelerating inflation and stronger economic data".
And, "a rebound from the excessive pricing of political risk for 2017 introduces upside risks to the EUR in the nearterm."
But, it still faces many near- and long-term threats.
A slowdown in the ECB's money-printing programme in 2018 is already in the price say Barclays, therefore it will struggle to find upside momentum from this corner.
Barclays cite risks from a downshift in core inflation expected later this year as a threat while the reacceleration of other economies in more advanced cyclical positions, will challenge the EUR’s relative value.
"Political risks are likely to weigh on the EUR again in 2018, with many events potentially threatening its very existence amid a “Balkanized” European Council, such as Italian election and banks, Greek and Portuguese debt," says Barclays.
Barclays Exchange Rate Forecasts 2017 to 2018
The recovery is forecast to commence in the second quarter of 2017.
The Pound to Euro exchange rate is forecast to rise to 1.19 by mid-year, 1.2345 by the end of the third quarter and 1.2820 by the end of 2017.
By March 2018 the exchange rate is forecast to be at 1.3158.
The Pound to Dollar exchange rate is forecast to trade at 1.30 by mid-year, 1.31 by the third-quarter of 2017, 1.32 by the end of 2017 and 1.38 by March 2018.