Analysts Question Pound Negativity as Crucial Brexit Talks Begin

Updated on
  • Next round of U.K.-EU negotiations to start this week
  • ING and Nordea say euro-sterling unlikely to reach parity

The pound’s four-week slide versus the euro may be overdone, according to analysts at ING Groep NV and Nordea Bank AB, with both saying the currency pair is unlikely to reach parity.

Sterling’s decline pushed it to the weakest level in 10 months against Europe’s shared currency last week, while it halted a three-week drop versus the dollar. Investors will now look to the next round of Brexit negotiations between the U.K. and the European Union starting this week, as they’re likely to set the tone for future talks and determine short-term direction in Britain’s currency.

While the pound could be susceptible to political headwinds, ING’s Viraj Patel said the currency was “materially undervalued,” which should limit further weakness. For Nordea’s Andreas Steno Larsen, “a very bumpy ride out of the union is already priced in.”

ING revised its euro-sterling forecasts higher to acknowledge political risks, but said the recent rally is “an overshoot of more fundamentally justified levels, rather than a sustained trend in EUR/GBP toward parity.” It forecasts the euro at 90 pence by year-end and 85 pence by the end of 2018.

The pound was little changed at 92.50 pence per euro as of 8:04 a.m. in London, having touched 92.70 pence on Aug. 25, its weakest since Oct. 7. Sterling rose 0.2 percent to $1.2901.

“The extent of GBP’s recent weakness -- and deviation from short-term fundamentals -- is now starting to look excessive relative to the near-term political risks at stake,” ING analysts wrote in a note dated Aug. 24.

EU Frustrated

Even as Britain seems to be leaning toward a more conciliatory stance in its recent position papers, its silence on key issues such as the Brexit bill and rights of Europeans settled in the U.K. has left EU officials frustrated and spurred doubts that the two sides would be able to discuss a trade deal in October. This has weighed on the pound, which has dropped the most after the dollar versus the euro this year among Group-of-10 peers.

Addionally, recent data have pointed to a loss in momentum in the U.K. economy, with consumer spending slowing and business investment stagnating. So while sterling’s slide versus the euro might be approaching its limit, some analysts still recommend selling it against other currencies.

Commonwealth Bank of Australia suggests selling the pound against the Canadian dollar, while Societe Generale SA recommends shorting sterling against the Turkish lira.

“As long as Brexit‑related uncertainties persist, a lower GBP may be necessary to encourage greater foreign capital flows to the U.K. to finance the current account deficit,” Elias Haddad, senior currency strategist at CBA, wrote in a note dated Aug. 25.

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