The Strategist

Bloomberg: Pound Sterling is vulnerable to Brexit claims

01/15/2018 - 14:26

The rally of the pound sterling, caused by hopes for the "soft" Brexit, may be threatened this week due to increased sensitivity to the comments of the leaders of the EU countries on the prospects of such a deal, writes Bloomberg.

The pound sterling has strengthened to its maximum since the referendum on Brexit on Friday, when there were signs that some countries want to conclude a Brexit deal that would keep the UK as close as possible to the bloc. However, the currency risks getting under pressure if Germany does not support this idea.

The pound sterling grew by more than 1% on Friday after reports that the finance ministers of Spain and the Netherlands agreed to advocate a "soft" Brexit. If Germany does not support this initiative, the pound sterling may drop below $ 1.35, Nick Verdi, a currency strategist of Standard Chartered Plc, warned.

Some analysts suggested that the rally in the British currency may be partly explained by the weakness of the dollar, rather than a fundamental overvaluation of the Brexit talks.

The resumption of rates on the dollar after the release of data indicating the acceleration of core inflation in the US may also put pressure on the British currency, analysts say.

The economic data of Great Britain can also affect the dynamics of the pound this week. Data to be published on Tuesday is expected to reflect a slight slowdown in inflation. On Friday, data on retail sales in the country will be published.

Previously, the Bank of England left interest rates unchanged at the end of the December meeting, taking a wait-and-see position after the first rate hike in November.

The Bank of England pointed to two important events, both of which could be positive for the economy. The regulator said that the budget presented by Chancellor of the Exchequer Philip Hammond in November will increase the pace of both economic growth and inflation in the coming years. The Central Bank also noted progress in the negotiations on the withdrawal of the UK from the European Union.

Some analysts believe that the British pound this year will remain largely stable both against the shaky US dollar and against the strengthening euro, but much will depend on the progress in the negotiations of the UK with Brussels on the withdrawal of the country from the European Union.

 Currency strategists interviewed by Reuters in the first week of 2018 were not very optimistic about how the next stage of the negotiations will take place, but most of them do not think that the pound is set for another major drop.

 The results indicate an increasing risk for the British currency after its largest annual rally since 2009. The pound rose 10 percent last year, mainly because the US dollar recorded its worst performance in 14 years.

However, the pound is still about 10 percent below the $ 1.50 level, where it traded before British voters refused to join the EU in a referendum. The pound rate is also 30 percent below the level where it was almost 10 years ago, before the crisis, that is, about $ 2.

 "For us, the UK currency remains fundamentally undervalued, and markets continue to assess the wide range of risks associated with Brexit," Investec analysts said. "But unlike our prediction a year ago, which suggested a pound rally, we are more cautious."

 Investec predicts that the pound will trade at $ 1.40 by the end of the year, well above the average forecast of $ 1.36 in the January Reuters poll. Their forecast for the pound against the euro is 0.8700, which is also slightly stronger than the median forecast at 0.8900.

 While the median projections in the last survey were slightly more resilient at the end of the year, significant differences remained among analysts based in the UK, Europe, the US and Canada regarding the prospects for the pound sterling in 2018.