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Pound Sterling Forecasts Downgraded at MUFG

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- GBPUSD forecasts downgraded at MUFG in November.

- GBP still set to rise, but path upward will be shallower.

- As strong Dollar and mounting Brexit uncertainty bite.

The Pound is still likely to rise against the Dollar over coming months but the path upward is shallower than before, according to analysts at MUFG, who have downgraded forecasts for Sterling at the start of the November month.

November's downgrades are the result of an improved outlook for the U.S. Dollar, as well a symptom of the Brexit talks having entered their final stage while uncertainty over the eventual outcome remains high. 

"We have lowered our GBP forecasts versus the dollar. This reflects the broader performance of the dollar but also the fact that we are now entering the ‘danger zone’ in Brexit negotiations where further gridlock could begin to do more serious damage to the UK economy," says Lee Hardman, an analyst at MUFG. 

Disagreement over how to manage the Northern Irish border in the event a trade deal to keep it open cannot be reached at a later date has been the main stumbling bloc in the negotiations so far. 

The Times reported at the weekend the negotiations are further along than is given credit for and suggested a deal that includes a solution to the controversial problem of the Northern Irish border could soon be announced. 

However, time is running short and the clock is still ticking.

"We are maintaining our view that a ‘no-deal’ Brexit will be avoided. We are now very close to a deal and we suspect legal wording can be found that results in a deal being completed. As the clock ticks, the incentive to do a deal will increase on both sides," says Hardman. 

Any agreement struck by the EU must first be approved by the European Council, then the European parliament and, after that, it must be ratified in all national parliaments across the EU before it can enter into force. 

So with the U.K. set to depart the EU at the end of March 2019 and just two formal European Council meetings scheduled between now and then, on December 13 and March 22, negotiators do not have long left to strike a deal. 

Failure to agree a deal would see the U.K. and EU default to trading with each other on World Trade Organization terms, which economists say would disrupt trade flows between the two. Most agree this would be economically damaging, particularly in the short-term. 

"Were it not for the profound uncertainty related to Brexit, we suspect the BoE would be now giving clear guidance on the need for additional monetary tightening. The evidence of building wage inflation is becoming clearer and nearly all MPC members have highlighted this," Hardman says.

At the very least, this would mean the Bank of England is unable to raise its interest rate for some time after the negotiations finish, at a time when rates elsewhere in the world are rising, creating an incentive for investors to dump the Pound and buy other currencies instead. 

Changes in interest rates are only normally made in response to movements in inflation but impact currencies because of the push and pull influence they have on international capital flows and their allure for short-term speculators. 

Hardman and the MUFG team forecast the Pound will finish 2018 trading at 1.3180 against the U.S. Dollar, up from 1.30 Monday, and that the pair will then rise to 1.3650 by the time the U.K. departs the EU at the end of March 2019. 

While those forecasts still imply some level of upside for the Pound, they also reflect downgrades from MUFG's projections just one month ago. Hardman and the team had forecast in October the GBP/USD rate would end 2018 at 1.3410 before climbing to 1.3950 by March. 

The Pound was quoted 0.42% higher at 1.2996 against the Dollar but is still down 3.7% for the 2018 year. 

 

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