Sterling to coast, but Brexit talks progress would drive rally

LONDON - 7 December 2017: Sterling’s outlook is stable over the coming year, but a few currency strategists polled by Reuters expect it to make significant gains if negotiations over Britain’s departure from the European Union take a positive turn.

Forecasts from the poll of around 60 foreign exchange specialists, taken Dec 4-6, predict the pound GBP= will be worth $1.33 in a month, $1.32 in six and $1.33 in a year.

It was trading at $1.34 late on Wednesday and medians were little changed from last month.

The most optimistic forecaster - ING - said the pound would be worth $1.53 in a year, which is the highest forecast provided in Reuters polls taken since the EU membership referendum in June 2016.

“We believe that sterling markets are underestimating the cyclical economic benefits of a Brexit transition deal. There is more upside to come – especially if a transition deal were to be signed, sealed and delivered in Q1 2018,” Viraj Patel at ING said.

“We sniff an opportunity right now for a positive sterling re-rating were we to see further Brexit progress.”

Currency speculators flipped to a net long sterling position for the first time in four weeks in the week to Nov. 28, according to Commodity Futures Trading Commission data.

However, investors remain hesitant about chasing the rallying pound higher even as the British government said it was close to an agreement with the European Union on how to move Brexit talks onto trade next year.

On Tuesday Prime Minister Theresa May came under pressure after a Brexit deal collapsed at the last minute and the gloomiest forecast, from NORD/LB, was for cable at $1.20 in a year.

“There will be no ‘sufficient progress’ to start with negotiations about trade at the beginning of next year. In an environment of uncertainty, economic conditions in the UK will become more and more fragile,” said Jens Kramer at NORD/LB.

“Therefore, we do not expect the Bank of England to proceed with another rate hike during the next year. All this will weigh on the exchange rate.”

Last month, the BoE added back the 25 basis points it took off borrowing costs in the aftermath of the Brexit vote, taking Bank Rate back to 0.50 percent, but it won’t act again until towards the end of 2018 when it will add another 25 basis points, medians in a recent Reuters poll showed. [ECILT/GB]

The euro zone economy has emerged as a star performer this year, outshining Britain, and the European Central Bank announced in October a cut to monthly bond buying from January. It is expected to wind down its asset purchases next year.

So against the euro EURGBP= the pound was expected to weaken a little. On Wednesday, one euro would get you 88.1 pence and according to the poll it would be worth 88.6p in a month, 90.0p in six and 12 months.

As with cable forecasts, the year-out range was wide, going from 76.7p to 102.0p.