It’s been a good couple of weeks for the pound, as it rallied against the euro and held onto its gains. But not all are convinced it will last.
According to a bearish note from analysts at Standard Bank, sterling will fall by another 5 per cent in trade weighted terms and will come close to parity against the euro in the next year.
Steve Barrow, head of G10 strategy at the bank, said the pound is “likely to shed more ground” in the coming months, and will hit £0.97 against the euro in the next year. He warns that while there will likely be “periods of hope among the gloom”, the “only question is the margin by which the UK – and the pound – will lose”.
“The real problem for the pound is that Brexit is more of a marathon than a sprint,” he said. “So while there might be the odd occasion when the pound ‘wins’ a sprint on citizens’ rights, or some other issue, the outcome of the whole race has probably been determined already.”
A 15% fall in sterling since the referendum suggests that the market already thinks that the UK has lost big. We still think it could be a bit bigger still in the final instance, perhaps by another 5% in trade-weighted terms. Hence longer-term investors should stay short of the pound even if shorter-term traders might be best served by being neutral or even slightly bullish for the near term.
Analysts at ING are less bearish, arguing that “a softer UK economic outlook and domestic political risks are adequately priced into the currency now, and only an escalation in either would warrant further idiosyncratic sterling weakness.”
But in a note last month, the Dutch bank also said it expects the pound will continue to slide against the euro in the coming months and take longer than previously expected to recover. It also says it would “not be surprised” to hear greater noise from the Bank of England over sterling weakness if it fails to rally soon.
“Greater ‘weak pound’ references in the context of BoE policy talk could, in turn, provide a backstop to the current GBP-selling environment,” they said.