Analysts Aren’t Buying Sterling Rebound as Brexit Deadline Looms

  • Pound is forecast to drop to $1.20 by end of second quarter
  • Currency has rallied more than 4 percent from January’s low

Allianz's MacDonald: Lots of Brexit Business Uncertainty

The pound fell for the fourth time in five days as currency strategists remain unconvinced by its rebound in the past month, with their forecasts for the end of the second quarter rooted at the lowest level on record.

Sterling has climbed more than 4 percent since Prime Minister Theresa May laid out the U.K.’s plan for Brexit last month. Still, strategists expect the bounce to be short-lived, with the currency predicted to drop to $1.20 by mid-2017, according to the median forecast in a Bloomberg survey. May kept her plan to trigger Brexit by the end of March on track this week after defeating a rebellion from some of her own Conservative Party colleagues by promising them a vote on the final deal with the European Union.

  • The pound fell to a two-week low on Tuesday, hurt by a broad dollar rally amid growing Brexit-related market concerns and worse-than-expected U.K. economic data. It fell 0.2 percent to $1.2488 on Wednesday.
  • Sterling has fallen 16 percent since the U.K.’s June vote to leave the EU, and a move to $1.20 would put the currency within 1.5 percent of 31-year low reached in October.
  • Parliament’s limited say in the deal to be presented to the EU, could lead to a situation where the U.K. might have to adopt WTO rules which would massively restrict foreign trade, according to Commerzbank analyst Thu Lan Nguyen.
    • “From an economic point of view that would be an absolute worst case scenario. Parliament in Westminster therefore faces the choice of either biting the bullet or to be leading the entire country down a cliff,” she writes in a client note
    • Against this background she predicts “considerable potential for set-backs in Sterling exchange rates”
  • Standard Bank’s head of G-10 strategy Steve Barrow has a similar outlook for the economy:
    • “MPs can’t say to the government that it does not like the final deal and wants it to go back and negotiate a better one. In our view it is this cliff-edge issue in just over two years’ time that could weigh heavily on firms’ investment and location decisions, to the detriment of the economy and possibly the pound,” he writes
    • Standard Bank predicts the pound at $1.16 in 6 months
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