British Pound: Worst Might be Over say Barclays

- Barrier to significant further weakness from here is elevated

- In 2018 Barclays boast good form in forecasting moves in the Pound

- Nomura see potential for near-term weakness, but remain bullish longer-term

Barclays exchange rates

© Pound Sterling Live

An under-fire British Pound might just have seen the worst come to pass suggests a prominent foreign exchange analyst we follow.

"Sterling has passed its near-term apogee as markets reassess the potential for UK growth and the BoE's policy path," says Hamish Pepper, a foreign exchange analyst with Barclays, the UK high street lender and global investment banking giant.

Barclays make the call following a tough period for Sterling which has fallen against the majority of major currencies of late, in a move that takes some of the shine off what has in fact been a stellar year for the currency.  

A regime shift in foreign exchange market focus from Brexit to Bank of England policy is seen behind the move with a flush of poor data releases in the first three months of the year suggesting that the Bank might step away from raising interest rates in coming months.

Part of Sterling's attraction in 2018 has been the expectation for higher interest rates; at one point expectations for a 0.25% rise in May was running at over 80%. Today, it is down to 20%.

The Pound has fallen sharply against the Euro with highs recorded just below 1.16 swiftly giving away to a slip back below the 1.15 barrier to a six-week low at 1.1343 which is the quoted inter-bank rate at the time of writing.

Meanwhile, the softer Pound combined with a rejuvenated Dollar means the Pound-to-Dollar exchange rate has been in decline for 9 of the past 10 trading days.

Pepper says the major selling pressures might be easing, and fresh declines will only be likely if expectations for an interest rate rise in 2018 are completely discounted. "Further weakness is likely but would be based on incoming data entertaining the possibility of no hikes this years, not just May."

We see this as an high bar to leap for Sterling bears as the vast majority of economists are united in the view that data should start picking up over coming months, and as such the prospect of a 0.25% Bank of England interest rate rise in 2018 is still highly likely.

Barclays have had immaculate form in forecasting moves in Sterling thus far in 2018 we note, they had maintained a bullish stance for much of the year, but in late March warned the UK currency might be due a turn lower.

On cue, this turn lower certainly materialised three weeks later when the Pound was dumped in response to the paring back of expectations for a Bank of England interest rate rise in May.

"While we continue to envision some GBP appreciation over the forecast horizon, we see little impetus for further near-term Sterling gains and are neutral at current levels," said Pepper at the time.

 

Near-Term Moves are Data Dependent

With that in mind, the releases of economic survey data for April due out on May 1, 2 and 3 will be key - IHS Markit will be releasing their PMIs and as we note here, this should  determine travel in Sterling this week.

“We continue to think that following the recent (and in our view temporary) soft-patch in the data the Bank will resume on a path of a six-monthly hiking cycle. After all, we remain upbeat on global growth and while Brexit poses a downside risk to the UK specifically we still see the UK economy growing at a rate close to its new – lower – trend,” says Jordan Rochester, an analyst with Nomura Bank plc in London.

Indeed, Nomura strategists maintain a 'buy' on the British Pound, but are cautious that near-term weakness might continue.  

"We are not fading the move in GBP for now. The market will likely continue to head lower in the short term especially in GBP/USD, as that is where the bulk of long GBP positioning lies. It’s when we get to this week that any fresh short positioning in GBP may struggle, as we expect the April PMIs to show signs of bouncing back," says Rochester.

Nomura believe it’s not just the BoE that will drive GBP over the next month, after the May Inflation Report is out of the way the government’s position on the customs union may change owing to parliamentary pressure heading into the June EU summit.

"If Theresa May changed the government’s position, but does not face a leadership challenge this could lead to a significant upward move in GBP into year-end, in our view,” says Rochester.

Analyst Derek Halpenny, European head of Global Markets Research at MUFG strikes a similar tone to that adopted by Rochester and Pepper, suggesting that the UK economy should start picking up from here, and this will in turn ultimately support Sterling.

"While the GDP data for Q1 was much weaker than expected, there is still reason to believe that the slowdown is temporary. When that’s confirmed, the MPC will likely act quickly. Construction and the collapse of Carillion were the main areas of drag on the economy in Q1. Assuming we see economic data to back up our view that Q1 weakness was temporary, we would expect the MPC to respond relatively quickly. We don’t see considerable downside scope for the Pound from here," says the analyst.

 

Forecasts for the Pound

Barclays forecast the Euro-to-Pound exchange rate at 0.88 by the end of March 2018, 0.87 by the end of June, 0.86 by the end of September and 0.85 by end-2018.

This gives us respective Pound-to-Euro exchange rates at: 1.14, 1.15, 1.16 and 1.18.

Nomura are forecasting the Pound-to-Euro exchange rate to ultimately remain in touching distance of 2017-2018 ranges with a peak being seen at 1.16 - which should be achieved in the mid-year period.

Year-end forecasts see the exchange rate back down to 1.1230 - which is more or less where we see the exchange rate at this time.

The Pound-to-Dollar exchange rate is meanwhile forecast at 1.43 in mid-year and 1.48 by year-end. Early 2019 sees the pair back up to 1.50.

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