British Pound vs Dollar, Euro: The Only Way is Up in 2017 Forecasts Nordea 

After one of the worst years in its history, the British Pound could make a comeback in 2017 according to Nordea Market’s FX Strategist Aurelija Augulyte.

“2016 was a disaster for the GBP, as the unexpected Brexit vote knocked it off most since the Lehman crisis,” she writes.  “Next year it will stage a comeback.”

On the surface the currency appears to have little going for it: Brexit uncertainty remains unresolved, inflation is rising, wages and employment have reversed their previous uptrends and GDP growth is set to stall, according to most uber-pundits, experts, and bank governors…

Yet, Augulyte remains unabashedly positive about the prospects for the UK currency.

As far as the biggest bugbear goes – Brexit risk, she actually sees the worst as over.

In October, the markets priced in a worst case “Hard” Brexit scenario on the day after May’s “Brexit means Brexit” speech at the Conservative Party conference but Augulyte believes the currency has established a baseline.

With talk of parliamentary involvement, the imposition of constitutional law and creative thinking in relation to transitional arrangements she sees a greater possibility of a “Soft” rather than “Hard” Brexit now.

She also sees increasing political risk in the Eurozone – and Trumpomania – as overshadowing Brexit uncertainty in 2017, which will in all probability become ‘old news’.

“Now that the “hard” Brexit has become a market’s baseline, should we shift towards a softer form of Brexit – avoiding an exit “cliff” with a transition agreement – the markets will be relieved. It could happen as PM May will deliver the Brexit plan before actually triggering Article 50,” says the strategist.

But what of the Pound’s other shibboleths?

Forecasts for Lower GDP Growth Overdone

Projections of lower growth in 2017 are overdone claims Augulyte, since they do not take into account a strong housing market:

“The Bank of England (BoE) has multiple times repeated that the GBP weakness is partly due to worsening economic prospects after the Brexit referendum.

“However, so far the economy has been resilient.

“While industrial production has disappointed, the leading indicators for exports and production are positive.

“Also, the housing market collapse is likely to be averted, as some leading indicators suggest an upturn as early as in H1 2017.

“Should it materialize, instead of the current consensus forecast of 1.1% growth in GDP in 2017, we will see growth above 1.5%,” says Augulyte.

House Prices are set to rise in 2017 following the Royal Institute of Chartered Surveyors (RICS) index higher.

The Nordea Strategist even thinks there is an outside chance of the Bank of England (BOE) raising interest rates.

After all, the Bank’s current position has shifted to ‘neutral’ and could go up or down, according to the BOE themselves.

Governor Mark Carney has also said he will not tolerate an excessive inflation “overshoot” therefore rising inflation may lead Carney and the MPC to raise interest rates to defend the pound.

In addition, since the BOE tends to eventually copy the Fed, there is a chance now that they will likewise raise interest rates as the Fed have done, which would be positive for the Pound.

Finally, Augulyte sees the Pound as massively undervalued:

“The GBP has lost nearly 13% against a basket of currencies in 2016, marking one of the three largest annual falls in three decades.

Above: The year after a bad year for the Pound the currency always rebounds higher.

“Notably, the first two were somewhat reversed in the following year – the “mean reversion” argument,” she notes.

The Pound is undervalued according to almost any metric you care to choose:

“Fundamentally, too, the GBP is now one of the most undervalued currencies among the G10.

“By some measures of PPP, it is more than 10% too cheap relative to the USD.”

The Purchasing Power Parity is a favoured way of calculating fair-value for a currency using a universal basket of everyday goods required by most people in the world.

The values should be the same for different countries when the exchange rate is factored out, assuming they are at fair value.

Whilst this measure of value is old fashioned and does not take into account the effect of global capital flows which in the modern global economy now dictate FX market moves so much, it is often employed, along with numerous others, by institutional investors.

“While it is nothing to dictate the direction in the next few weeks, surely, the valuation is a pull factor for many central banks and institutional long-term investors when rebalancing their portfolios,” says Augulyte.

Source: Pound Sterling

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