LONDON — The biggest and most obvious financial impact for regular Brits since the UK voted to leave the EU last June has been the huge drop in the value of the pound against virtually every other major currency around the world.
Sterling witnessed the largest single intraday drop against the dollar in its history the morning after the vote and continued to drop for several months afterward.
Those months were filled with wild swings in value, a flash crash and a shift from being driven by economic data releases, to moving on political developments, especially those related to Brexit.
Britain’s currency now appears to be recovering to some extent and is threatening to break above 1.30 against the dollar for the first time since September last year. However, what happens to sterling in the future — with hurdles like Brexit and the upcoming general election clouding the picture — is anybody’s guess.
To find out what might happen to the pound, Business Insider rounded up forecasts from banks, economic research houses, and trading firms about which way they think sterling is headed over the medium-term.
Most have recently increased their forecasts, largely on the assumption that Theresa May’s Conservative Party will win an increased majority at June’s election, paving the way for her to take a more conciliatory stance on Brexit, and move away from the sort of Brexit favoured by hardline Conservative MPs, who currently have a disproportionate influence on policy thanks to the party’s slim majority.
However, many have raised forecasts from a very low baseline, and as a result, still expect the pound to end 2017 lower than it is currently trading.
Check out the forecasts of economists, analysts, and strategists below (all forecasts are for the pound against the dollar unless otherwise specified):
Forecast: Stronger by the end of 2017, no precise forecast
What they say: 'The likely electoral impact on Sterling depends on whether an increased Conservative majority (as the polls expect) leads to a 'harder' or 'softer' Brexit. The argument for a softer Brexit (which supposedly explains Sterling's initial rise following the announcement of the election) is that with a larger majority, the Prime Minister will have greater flexibility to negotiate an agreement with Brussels that avoids the potentially more negative aspects of leaving the EU, with subsequent Parliamentary approval and freedom from the constraints of the hard Brexiteers,' Morris said in analysis sent to Business Insider.
'The counter narrative - it is worth noting that sterling has given up its initial post-election announcement gains against the euro, even though it has held up against the dollar - is that newly-elected MPs are more likely to support a hard Brexit, thereby increasing the likelihood of Britain reaching such an agreement. We think that a hard Brexit was already priced into the markets, and for the time being the prospect of a softer Brexit will drive the currency higher, unless the economic data weakens decisively. That weakness may be appearing, given that first quarter GDP data came in below expectations. So even if negotiations move in Britain's favour, the economy might not cooperate.'
Forecast: Stronger by the end of 2017, no precise forecast
What they say: 'It's clear from the reaction in foreign-exchange markets that the general election presents upside risks for the pound. The Conservative Party is riding high in the polls and will secure a larger majority parliament, giving Theresa May more freedom to implement her domestic policy agenda, and the Brexit that she favours,' Haralambous told BI over email.
'The prime minister has committed to taking the UK out of the single market -- but a bigger majority would mean that Mrs May would no longer be hostage to Brexiteer backbenchers holding her to account on the terms of the final deal. The pound may reverse some of its recent gains as the economy slows in 2017-18, but to the extent that the general election will deliver greater political stability, we expect to pound to be firmer this year than we previously assumed.'
Forecast: $US1.45 by the end of 2018.
What they say: On the day Theresa May called for a general election in May, Morgan Stanley's Sheena Shah said in a research note: 'Stabilisation of GBP has already started, which should aid inflows into the currency. Notably, FX reserve managers have started to move out of the EUR and into GBP. Our estimations suggest the market has priced in a lot of the negativity associated with Brexit, with today's developments starting to reverse some of that pricing. The risk to our view is a large undershoot of UK growth data in coming months.'
Forecast: Sterling to drop against the dollar and euro by the end of 2017
What they say: Hallam told BI: 'We believe that the upcoming UK general election will allow the Prime Minister to consolidate and grow her majority, while providing better scope for transitional arrangements so that the probability of a 'cliff' exit becomes lower -- which reduces the severe tail-risks for Sterling.
'But assuming the UK pursues a reasonably hard Brexit approach, the period will certainly be challenging from an economic and capital flows perspective. Our shorter-term view of a bounce in GBP/USD towards 1.30, based on the general election triggering a short-covering move in Sterling, has now largely been realised. The months ahead should see the Federal Reserve raise rates in June and September and the ECB upgrade its outlook on the economy paving the way for it to announce a tapering of its QE purchases in September. The Euro should also benefit from strong equity inflows into the region as investors adjust their asset allocations to benefit from an improving earnings outlook in the Eurozone. Meanwhile the onset of the Brexit negotiations in June should highlight the challenge the UK faces in leaving the EU and we believe the Bank of England is likely to leave rates unchanged this year.
'Overall, this leaves us biased towards higher levels of Euro and US dollar vs Sterling for balance of this year.'
Forecast: 'Sterling to reach perhaps $US1.35 by the end of this year,' Oxford's Martin Beck told BI.
What they say: 'Fundamentally, sterling is cheap. That may mean little to investors given the widespread perceptions that leaving the EU will entail a major regime change. Our house view is that Brexit will eventually lead to a permanent loss of output equivalent to 3% of GDP by 2030. That scenario may warrant a lower equilibrium level of sterling. In our judgment, that unknown new level is not 15%-20% lower than fundamental anchors. Our view is that up to 10% upside in sterling is a reasonable medium-term expectation, especially relative to the dollar,' a note from Beck at the end of March said.
Forecast: $US1.27 by the end of 2017, up from a previous forecast of $US1.19.
What they say: 'The announcement of an 8th June General Election was a game changing event for GBP. We have consequently revised our GBP forecasts which mainly impact the front-end of the profile, no longer expecting the one final dip. Our end-2018 GBP/USD takes us closer to our estimates for fair value than previously,' Sharma wrote early in May.
'GBP will likely trade at a structurally lower equilibrium level and GBP/USD is unlikely to regain its pre-Referendum range. A slowing domestic economy tempers prospects of sustained upside.'
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