Sterling forecasts at post-Brexit high on BoE, negotiation hopes
LONDON (Reuters) – Sterling forecasts are at their highest since Britons voted to leave the European Union, a Reuters poll found, partly as a result of optimism driven by progress in divorce talks and expectations of another interest rate rise next month.
But the main reason behind the move is more related to the outlook for the currency that sterling is quoted against, the US dollar, whose path of least resistance remains down and is under even more pressure over a growing US-China trade spat.
While an economic recession predicted in the event of a “Leave” vote in the June 2016 referendum never materialised, partly because very few expected Britain’s main trading partner to do so well, the expected slump in sterling did.
At the start of 2016, when the “Remain” camp was expected to win, one pound would get you about $1.49. On Thursday, it was only worth about $1.40, having rallied approximately four percent this year as political fears weighed on the greenback.
So, for the 10th consecutive monthly Reuters poll, the 12-month forecast was revised up and in the latest survey the outlook was for cable to be at $1.44 this time next year.
In one month, cable is forecast at $1.40 and in six months at $1.42, all stronger than predicted in March, according to the April 3-5 poll of over 50 foreign exchange strategists. Seven contributors had forecasts of $1.50 or higher, the most since before the referendum.
“On the one hand, the Brexit negotiations should see some breakthrough … and on the other hand it will depend on what the Bank of England will do in the coming months. We have a positive view on cable,” said Roberto Mialich, currency strategist at UniCredit.
Bets in favour of sterling rose to a multi-year high last week with the latest level of net long position not seen since July 2014, according to Commodity Futures Trading Commission data.
Sterling’s fall in the aftermath of the June 2016 referendum sent inflation soaring above the BoE’s two percent target. But in the months after the vote, the central bank cut borrowing costs to a record low 0.25 percent to support growth.
That move was reversed little over a year later and with inflation at 2.7 percent in February, a separate March Reuters poll predicted the BoE would add another 25 basis points when policymakers meet in May.
Britain is set to leave the European Union on March 29, 2019, severing ties that helped define its national identity, its laws, and its international stature over 46 years of integration with European neighbours.
But a transitional deal was agreed in principle with Brussels last month, effectively keeping Britain inside the EU single market until the end of 2020, calming anxious businesses and buying Prime Minister Theresa May more time to negotiate.
Against the common currency the pound will tread a different path. On Thursday a euro was worth around 87.3 pence and in a year it will get you 88.0p, the poll found.