LONDON – 2017 has been a relatively quiet year for the pound compared to the wild ride endured in 2016.
Sterling witnessed the largest single intraday drop against the dollar in its history the morning after Britain voted to leave the EU in June last year.
After some jitters early in the year, including a fall to close to 1.20 against the dollar, the pound returned to behaving little more like a normal, cyclical currency, moving on data events and Bank of England announcements.
But as Brexit negotiations progress, sterling is seemingly back to trading on developments related to the UK’s impending departure from the EU. That was in full evidence last week, as sterling swung wildly on good and bad news about the Irish border deal, which had been a major sticking point.
But what will happen next year?
Business Insider got in touch with analysts and strategists from a wide range of financial institutions, as well as combing through year ahead forecasts from lenders to find out.
Most forecasters hold pretty similar views – namely that the pound’s fortunes are set to be inextricably linked with how Brexit negotiations progress as the year goes on. As one economist put it: “Good news, sterling goes up. Bad news, sterling goes down.”
However, there are varying degrees of optimism and pessimism among those forecasters, largely reflecting their views on how Brexit is set to progress.
Check out forecasts from 11 different institutions below.
ING: A cyclically weakening US dollar means that GBP/USD could find itself pushing on beyond 1.40 – and up towards 1.50 by end-2018.
The analyst: Viraj Patel, FX Strategist
What they say: “Beyond the ‘Deal or No Deal’ risks, the big picture focus for GBP remains on gauging the actual size of the post-Brexit supply shock and the evolution of productivity under a (potentially) less open UK economy.
“A year on from noting this in last year’s FX Outlook, we are still none the wiser; 2018 ‘should’ provide more clarity as Brexit talks progress to a trade deal, but it’s highly likely that we won’t know ex-ante what the true long-run fallout for GBP will be. Hence, our GBP profile is under constant review over a very narrow rolling window – especially when taking stock of the fragile UK political environment.”
Societe Generale: GBP/USD 1.30, and EUR/USD 0.98.
The analyst: Kit Juckes, Macro Strategist
What they say: “Lots of bad news is priced in and lots of bad news is likely. We expect three years of real GDP growth below 1% in 2018-2020, averaging 0.8% per annum, about a quarter of the world’s average growth rate.
“On a positive note, that ought to be enough to shrink the current account deficit to under 2½% GDP, but that’s a Pyrrhic victory. We expect the Bank of England’s MPC to keep rates on hold through 2018 and, ultimately, to be forced into further easing, against a backdrop of tighter policy elsewhere. All of which will anchor sterling.”
“Even with sterling making new lows in tradeweighted terms (nominal and real), we see only the GBP/USD meandering in a 1.30-1.35 range for most of 2018.”
Morgan Stanley: $US1.24 by the fourth quarter of the year.
The analyst: Team led by Hans W. Redeker.
What they say: “Beyond balance sheet vulnerabilities, GBP will likely be weighed down by the political and economic consequences of Brexit. Weakness in investment should result if Britain leaves the EU without alternative arrangements in place. Keeping EU access for an interim period may be the best outcome for now, but will likely come with a high exit bill price tag which could exceed the tolerance levels of some Conservative party members. Political uncertainty potentially leading to early elections is not yet in the GBP price.”
Goldman Sachs: No figure stated
The analyst (s): Zach Pandl, Kamakshya Trivedi, Ian Tomb
What they say: “Political risk may trump macro developments in the UK as well. While the prospects for a Brexit breakthrough in December have grown, that even such a small step has proved as tortuous is a testament to the difficult journey ahead. Backing away from its most important trading partner was always likely to be costly for the UK economy, but any setback on the transition deal or a slow pace of negotiations on a future trade deal will likely only increase costs to the UK.
“On the other hand, clarity on the terms of a transitional deal could mitigate some of this political, economic and institutional uncertainty, and this would be supportive of a sustained GBP bounce, more so than economic data or BoE policy, which may end up being less dovish than commonly assumed. We continue to expect the politics of Brexit to remain messy.”
UBS: EUR/GBP forecast for end-18 is only slightly changed to 0.95.
The analyst: Team led by strategist Yianos Kontopolous.
What they say: “Brexit and the UK’s external imbalances have been central to our negative view on sterling for a while. Our FEER model screens sterling as c. 20% over-valued in TWI terms even after the substantial drop since the Brexit referendum, as the UK current account has yet to correct to more sustainable levels. In addition, substantial revisions in the income account included in the Q2 Balance of Payments release imply a larger gap to more sustainable current account levels than previously estimated.”
“At the same time sterling remains one of the most cyclical currencies in G10 due to the “risky” composition of the UK’s external assets. In a benign environment for risky assets, improvements in the current account via the income account are likely to persist, thereby reducing the UK’s external imbalance.
“The continuation of the Eurozone’s solid recovery in particular could benefit sterling both via the income account (as Europe is the largest destination for UK’s FDI) as well as the trade balance. On balance, a worse starting external imbalance should be offset to some extent by an increasingly favourable external environment.”
JPMorgan: GBP/USD risk scenarios range from 1.26 to 1.47
The analyst: The JP Morgan View team
What they say: “GBP remains particularly idiosyncratic and sensitive to the vagaries of Brexit related headlines. Although the end result of the past two weeks of drama around the EU-UK divorce bill has ended up with a reported break-through in the negotiations, we note this is but one of many hurdles in the overall Brexit negotiation process, which will increasingly dominate GBP in 2018 as we head closer to the cliff-date of March 2019.”
Commerzbank: Sterling to “plod along” in 2018.
The analyst: Peter Dixon, Chief UK Economist
What they say: “I think the markets got their retaliation in first back in June and September last year. Ever since then, they have been a lot less negative. If you look at the market positioning of sterling, it has turned moderately positive. It went heavily negative in 2016, but it is now flat. Under those circumstance, that suggests that markets themselves have a less negative view of where sterling goes from here,” Dixon told Business Insider at the launch of Commerzbank’s 2018 UK Outlook.
“It would appear that sterling is outside the bounds of recent experience. In other words, it is weaker as a consequence of Brexit relative to a normal model based on interest rate expectations.”
“I do think sterling is going to be volatile for quite some time to come. The last couple of days have been a microcosm of what you might expect [going forward]. Good news, sterling goes up. Bad news, sterling goes down. That’s going to be the pattern for the next year.”
“Sterling is clearly weaker against the euro than the fundamentals would justify, but it is difficult to see what would prompt a significant rally.”
LMAX Exchange: An “increasingly smooth” path for the pound in 2018
The analyst: Joel Kruger, currency strategist
The forecast: An “increasingly smooth” path for the pound in 2018.
What they say: “We believe 2017 was a pivotal year for the Pound. A critical push above 1.2775 back in April sent the message that a meaningful bottom was in place, and there has since been a clear shift in mentality from ‘sell on rallies’ to ‘buy on dips.’ Brexit negotiations are progressing and while there will still be bumps along the way, the path forward should be increasingly smooth.
“The UK economy has held up relatively well in the face of Brexit turbulence and this, in conjunction with rising inflationary pressures, will keep the Bank of England moving forward with policy normalisation, resulting in attractive GBP yield differentials. Reserve manager diversification on the back of US administration’s soft Dollar protectionist policy and an anticipated capitulation in global equities will only inspire additional inflow.”
Deutsche Bank: Stronger sterling, if the UK gets more clarity on what a transitional deal with the EU will look like.
The analyst: Oliver Harvey, Macro Strategist
What they say: “Only if an early transition can be agreed, effectively delaying Brexit until 2021, can the focus turn back to fundamentals. On the policy front, the market would likely price more from the Bank of England, not least as Governor Carney said that a re-calibration of monetary policy would be warranted once agreement was reached. The problem is that sterling’s relationship with rate differentials versus both EUR and USD has broken down (figures 1 and 2). Partly this is explained by Brexit, but another factor has been the dominance of other drivers, in particular capital flows, in FX this year.
“In sum, we see some structural upside for GBP if a transitional deal emerges early next year along with a re-rating of the growth outlook. But clarity on the former is unlikely to emerge until after the December EU Council and there is renewed concern about the future of PM May’s leadership.”
BNP Paribas: $US1.25 by the middle of next year
The analyst: Sam Lynton-Brown, FX Strategist and Alexander Jekov
What they say: Our view remains that the UK faces a number of cyclical economic and political challenges and, with the GBP rich versus estimates of its short-term fair value (see chart) and investor positioning fairly neutral, we see considerable scope for GBP weakness over the next six months (targeting 1.25 in GBPUSD).
JPMorgan Asset Management: Sterling to tread a careful path going forward
The analyst: Roger Hallam, Chief Investment Officer for currencies
What they say: “The timing and clarity of the transition deal will be key in terms of the outlook for sterling. It seems likely a transition deal will be agreed in the first quarter, with the terms likely to be dictated by the EU (developments over the past month have made it clear the EU is the dominant partner in the negotiations). We expect the focus will then shift to the terms of the UK’s trading relationship with the EU post the transition period. This will be a very difficult process (evidenced by the length of time it took to reconcile some of the softer issues within past negotiations).”
“Reconciling the irreconcilable will prove a momentous task. The UK’s desire for a comprehensive trade agreement, whilst also seeking the limit free movement of people and achieve legal sovereignty is likely prove very challenging.”
“We are therefore cautious that the market’s recent positive view on Sterling could be reversed in the months ahead.”
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