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- GBP stabilises but new lows await in September says Westpac.
- As a strong USD is set to force GBP and others lower for longer.
- GBP to hit new post-referendum low even without 'no deal' Brexit.
The Pound stabilised early in the new week but nascent stability will soon give way to renewed losses, according to analysts at Westpac, who forecast the British currency will hit a new post-referendum low over the coming months even if parliament is succesful in preventing a 'no deal' Brexit.
Sterling received a boost in the Monday and Tuesday sessions as markets welcomed a report from The Times claiming lawmakers can prevent the government pursuing a 'no deal' Brexit at the end of October, which arrested a multi-week slide in the British currency. But the claim is yet to be proven while the Dollar is set to get even stronger in the months ahead, Westpac says, which will drive the Pound-to-Dollar rate down to a new post-referendum low and levels that are historically rare for Sterling.
"Through both ‘risk-on’ and ‘risk-off’ episodes this year, the US dollar trend has remained upward sloping with the US seen as both the best-performing developed market and a yielding ‘safe-haven’ amid global uncertainty. Despite President Trump's actions this month, to our mind, this US dollar trend is set to extend into 2020," says Elliot Clarke at Westpac.
Westpac is looking for the Dollar to advance to new highs as the global economic impact of President Donald Trump's trade war with China is laid bare, which is bad news for the Pound-to-Dollar rate The world's two largest economies have slowed in the last year as business confidence and investment were hindered by the tariff fight between the pair, but other economies have been hit harder than either protagonist.
Trade tensions are seen forcing central banks in Europe and elsewhere to cut interest rates further from already-low levels, which risks neutralising the impact of Federal Reserve (Fed) rate cuts that were origininally expected to end the Dollar rally that's been ongoing since early 2018. The upshot is that amid this trade war, the safe-haven greenback will remain backed by the highest interest rate in the G10 universe, which is a significant draw for yield-hungry investors.
Above: Pound-to-Dollar rate at daily intervals, alongside the Dollar Index (orange line, left axis).
"Even after our forecast three cuts in the federal funds rate to 1.375% at December, US treasuries will remain a high-yielding safe-haven asset, further aiding the US dollar," Clarke says. "Also aiding the US dollar trend over the coming 12 months will be ongoing turmoil in the UK."
The UK is an extreme example of Westpac's scenario because the economy is facing the double-barrelled risk of a trade war that is escalating just as a so-called no deal Brexit is on the verge of materialising, both of which make it impossible for the Bank of England (BoE) to lift its interest rate and boost the attractiveness of the Pound in the process. In the absence of such rate hikes, the higher-yielding Dollar will weigh on Sterling.
October 31 will either see the UK forced by lawmakers into another delay of the Brexit process, or usher in a 'no deal' Brexit, so long as the European Commission maintains its current stance that it won't renegotiate the EU withdrawal agreement. Clarke says the uncertainty over the future political path of the UK will further scupper the Bank of England from raising its interest rate and take "a material and lasting toll" on the economy.
"The UK has a hard-line leader for Brexit negotiations with little, if any, room to negotiate a better deal than the one repeatedly voted down by UK Parliament. Another exit date extension, a general election, or worse, a no-deal exit come November are therefore growing possibilities. Suffice to say, the persistent uncertainty evident here will take a material and lasting toll on the UK's economy," Clarke writes, in a note to clients.
Above: Pound-to-Dollar rate at weekly intervals, alongside the Dollar Index (orange line, left axis).
Prime Minister Boris Johnson has pledged to take the UK out of the EU with or without a formal exit agreement on October 31 and after months of the previous government insisting that "parliament won't allow" a 'no deal" Brexit, Downing Street is now insisting there's nothing that opposition lawmakers can do to prevent such an outcome, even if there were at any point sufficient numbers of MPs willing to bring down the government in a confidence ballot.
Some MPs and opponents of the UK's break with the EU had hoped that a vote of no confidence would be enough to force the Prime Minister to request another extension of the Article 50 negotiating window before resigning. But the government says the law permits PM Johnson to set the date of any election that would follow such a vote and that there's nothing to prevent him making that date one that falls after a 'no deal' Brexit plays out on October 31.
Such an exit will mean the UK defaults to doing business with the EU on World Trade Organization (WTO) terms, which will place tariff and non-tariff barriers between the UK and a number of its largest markets. Economists say this could see growth turn negative in the short-term and lead to a slower pace of expansion over the long-term, necessitating lower interest rates than would have been the case otherwise. However, even if this scenario is avoided, Sterling is still set for more losses this year.
"We have reduced our range-low for GBP/USD to USD1.18 at September 2019, after which Sterling only lifts to USD1.26 by end-2020. Note the above forecasts are still predicated on a deal being reached in the December quarter to nullify the threat of a no-deal Brexit," Clarke warns. "The risks to this view are sizeable and growing by the day. We must therefore emphasise that Sterling could find itself at a much lower level than our central forecast over the coming year."
Above: Pound-to-Dollar rate at monthly intervals, alongside the Dollar Index (orange line, left axis).
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