GBP/USD: Expect a Recovery says Intesa Sanpaolo's Jamaleh

Intesa Sanpaolo's FX analysts says while he has downgraded his forecasts for GBP/USD he does still expect a rebound in Sterling to take the pair towards 1.30.

Sterling is oversold at current levels argues a prominent currency analyst who argues the currency should be higher based on economic fundamentals.

The losses that have taken GBP/USD to 30-year lows are said to be born of fear and are therefore liable to be corrected as more information on the Brexit process is made clear.

After hitting session lows of 1.1450 on Friday during the flash crash, the GBP/USD exchange rate recovered to close at 1.2434.

The damage by the move was however done and lingering momentum has since seen the currency pair edge lower to the 1.2226 we see at the time of writing.

The failure to fully recover the losses sustained in the flash-crash is important in that it advocates for a lower-for-longer Sterling profile argues Asmara Jamaleh, economist at Intesa Sanpaolo on the basis that confidence in the currency has taken a sever knock.

However, Jamaleh's forecast targets are still notably higher than current levels.

"The new forecast levels of the exchange rate reflect more a factor of risk than a projection based on the Pound’s fundamentals," says Jamaleh.

The view reflects that held by fellow analysts that Sterling has now become a political, rather than a cyclical, currency.

Assuming that after the recent statements made by Prime Minister Theresa May – which at the moment are generating fears of a hard Brexit – the UK government’s positions will soften, once the actual negotiation process is under way, sterling could recover in part next year. 

Such a recovery would however b on condition of the expected economic slowdown in 2017 remains approximately within the limits expected by the BoE, i.e. growth at 0.8% next year from 2.0% estimated this year.

However, the recovery would not be very likely to restore the exchange rate to its pre-referendum levels of over GBP/USD 1.40.

In light of the turbulences seen in the past few days – Intesa Sampaolo have revised down their 6m-12m projections from GBP/USD 1.30-1.35 to GBP/USD 1.28-1.33.

"The new forecast levels of the exchange rate reflect more a factor of risk than a projection based on the Pound’s fundamentals. Therefore, if data outline a less negative than expected fallout on the UK economy from Brexit, Sterling’s recovery would be stronger, on the same time horizon," says Jamaleh.

Latest Pound / US Dollar Exchange Rates

	Live: 1.3323▼ -0.02% 12 Month Best: 1.3789
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**Independent Specialist	1.3137 - 1.319 Find out why this is a better rate

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

Fed Hike Drives 1-3 Month Forecast Downgrade

The USD side of the equation is also important.

A surge in US treasury yields, which reached a four-year high, came on growing expectations for an interest rate hike before the end of the year.

Stubbornly low yields have kept a cap on the Dollar but recent rise is suggesting that might be changing.

The dollar is likely to see more upside if yields continue rising as more foreign investors will be attracted to invest their money in US bonds.

"Our new projections for the GBP/USD exchange rate are 1.20-1.22 on a 1m-3m horizon, from GBP/USD 1.25-1.27 previously, as this is the time horizon on which downside pressures should prevail, given the prospect of a bank rate cut by the BoE at the meeting of 3 November, of a fed funds rate hike before the end of the year," says Jamaleh.

Not all analysts are as certain as Intesa that the BoE will go ahead and cut rates though, which implies upsided risks to Sterling.

Hans Redeker and his team at Morgan Stanley see a reduced chance of a rate cut on the horizon and this could translate into less downside pressure on the Pound.

“Higher inflation expectations in the UK due to the expected impact from the exchange rate shock and the generally stable UK current account data have caused markets to price only a small probability of further BoE cuts this year. Comments from the Prime Minister suggest there could be more objection towards the BoE easing further this year,” comments Redeker.

Self-Imposed Uncertainty

Nevertheless, Morgan Stanley do not see monetary policy as a very strong driver for Sterling at the moment anyway with politics and news headlines driving sentiment towards the currency:

“Exit negotiations may now start in spring 2017, driven by political and not economic targets.

“With 46% of exports from the UK being sent to the EU, the UK may have to pay a high economic price for this strategy.

“GBP may have to fall further from here to compensate for this self-imposed uncertainty."

That said, the hard-Brexit stance may amount to nothing more than pre-negotiation posturing on the part of both the UK and the EU, according to Kathleen Brooks, head of research at City Index.

It is a common negotiating technique to start from a position of strength so that if compromises have to be made to reach a deal, not every advantage is given away in the process.

She speculates that some traders will be hoping, that if this were the case, the pound might rally on a more ‘diplomatic-than-expected’ deal.

“Those looking for a recovery in sterling must be hoping that the GBP-negative rhetoric from the Tory Party conference has peaked, and after the posturing from both sides, that the UK/EU Brexit negotiations will actually go rather well. “Many people hope that this will be the case, I’m just not that confident about a positive outcome at this juncture,” said Brooks.