- The British pound has lost almost 6% against the US dollar in the last few weeks.
- Deutsche Bank thinks sterling could be set to rebound.
- A hawkish Bank of England, progress behind the scenes in Brexit talks, and improving fundamentals for the currency could all spur progress.
Sterling has tumbled from 1.43 against the dollar to just 1.35 and is suffering its first monthly loss in April in nearly 15 years.
However, the fortunes of the pound could change again over the next week, according to the latest research from Deutsche Bank, with a chance of a sizeable rebound for the currency.
Oliver Harvey, a macro strategist at the bank, argues in a note this week titled “Pounded but not grounded” that three separate factors mean that the recent pain could be at an end.
“Sterling has suffered in the last two weeks,” Harvey writes. “GBP/USD has seen the largest fall since the aftermath of the Brexit vote in 2016, giving up all its gains this year. But we wouldn’t chase the price action from here.”
The first possible upside surprise could come from the Bank of England on Thursday. Having expected an interest rate hike for several months, markets have suddenly changed tack in recent weeks after a series of worse than expected data seemingly ruled out any such action.
While Harvey is of the opinion that the Bank of England will leave rates unchanged on Thursday, he believes there is a chance that the Bank will be more hawkish than most currently expect.
“We no longer expect a hike, but with the market pricing nothing, and with little in the way of communication from the MPC in recent weeks apart from one moderately dovish Carney interview, a surprise can’t be entirely discounted,” he writes.
“Bigger picture, the market is not fully pricing the first hike until February next year. It will be difficult for Carney to sound more dovish without admitting last November was a policy mistake. Coupled with UK economic surprises being at five-year lows, and we think the risks are asymmetric for a hawkish surprise.”
Harvey also argues that the prospect of a softer Brexit than previously expected could also spur the currency.
The UK government is not making much outward progress on Brexit, with scuffles between Prime Minister May and ministers like Boris Johnson dominating UK political news flows but Harvey argues that it now seems likely that Britain is heading for a softer Brexit than previously expected.
“We continue to see the bar to Brexit negotiations breaking down as high,” Harvey writes.
“Internal government debates on the customs union have dominated the headlines, but underlying news flow continues to point to a pivot towards a softer Brexit at some point this year, such as the fact UK customs infrastructure won’t be ready until the mid-2020s.”
Finally, on a more fundamental basis, Harvey argues, the pound looks like a fairly decent bet right now as it is “now in the cheapest 25% of major currencies.”
“The recent improvement in the UK’s current account deficit, from over 6% to 4% per cent of GDP, due to import compression and an improving income balance, has helped it to become cheap on this basis,” he writes.
Of course, it’s by no means certain that the pound will rebound, with Harvey not ruling out two big risks to the downside.
“The BoE abandoning their tightening bias at this meeting or Brexit talks grinding to a halt in June on the Northern Ireland issue are the two biggest risks. But at this juncture, we think both are unlikely,” he concludes.
Business Insider Emails & Alerts
Site highlights each day to your inbox.