Pound Sterling to Avoid a 10% Hit Against the Euro and Dollar say Credit Suisse 

• Pound to Euro exchange rate today: 1.1560
• Euro to Pound Sterling exchange rate today: 0.8652
• Pound to Dollar exchange rate today: 1.2324

Pound Sterling was forecast to take another 10% slump on hard-Brexit manifesting itself according to Credit Suisse in their projections released at the start of 2017.

And a hard-Brexit – exiting the single market – is exactly what has been presented by the UK Government who on Tuesday 18 January laid their negotiating position on the table.

But – that call for a 10% depreciation on such an outcome is now unlikely say Credit Suisse.

Why?

When Hard-Brexit isn’t Quite Hard-Brexit

Credit Suisse came into 2017 forecasting the Pound to Dollar exchange rate at 1.20 in 3m and 12m, and the Euro to Pound Sterling exchange rate 0.858 and 0.83, respectively.

From a GBP into EUR perspective this equates to 1.1655 and 1.2048.

“Our view was that in a full hard Brexit scenario GBP can trade about 10% weaker, while on a softer outcome it had room to rally by about that much,” says Shahab Jalinoos at Credit Suisse.

The forecast targets were to stick until such a time as the market got much greater clarity on end outcomes, something Credit Suisse did not anticipate in the next 12 months.

The interesting thing about Theresa May’s Brexit speech is that the “comments do not leave us much wiser,” says Jalinoos.

Yet, some important clarity has been provided nevertheless.

As such that expected 10% decline that hard-Brexit requires has been negated.

The following factors have mitigated against another notable slip in the Pound:

1. “While it’s true that leaving the single market comes under the banner of a hard outcome, it’s also the case that the promise of parliamentary votes and transitional deals can be taken as silver linings by those hoping for a more measured and less confrontational end outcome with relatively low market and economic volatility.
2. “And while today it may indeed appear that the EU will not want to bend to the UK’s will, it remains to be seen how the political landscape looks once elections in 2017 are out of the way.
3. “And even threats like a new Scottish independence referendum do not seem so threatening given the public appetite in Scotland for this appears weak.
4. “Also, the triggering of Article 50 by end-March carries less mystery given the UK government’s position is now much better understood. In this context, despite the noise in the past week, we are reluctant to change our GBP forecast set.”

Excessive Sterling Strength Must be Sold

Credit Suisse’s are therefore sticking to their exchange rate forecasts for GBPUSD at 1.20 in 3m and 12m, and EURGBP at 0.858 and 0.83 in the same timeframe.

But, any exuberance in Sterling is unlikely to last.

Therefore, analysts are taking a “sell rallies” view on GBP longer term.

“If the UK economy is beating expectations for growth, GBP weakness is very likely a key contributor and persistent currency strength would not be welcome for UK policymakers,” says Jalinoos.

Meanwhile inflation is expected by Credit Suisse to average at least around 2.5% over the next two years, which will be at the higher end of the G10 spectrum and lead to a loss of competitiveness if unit labour costs were to follow).

The fragile balance of payments position is expected to keep GBP capped too.

Also, the EU may be more explicit than we expect in the next few months about being unwilling to compromise on its terms of engagement.

“GBP/USD rallies towards December highs around 1.28 are a sell in our view, while EURGBP dips towards December lows around 0.8350 are a buy,” says Jalinoos.

Source: PoundSterling

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