Thursday, October 21

Article 50 marks sterling’s final dip: Brexit talks to rock pound


 

 

Baml expects sterling to rise to $1.29 by the end of the year, while Morgan Stanley believes sterling will climb to $1.26 against the dollar by the end of next year and $1.45 by the end of 2018.

The pound faces a rollercoaster ride next year as policymakers start the process of leaving the European Union, analysts have warned.

The expected triggering of Article 50 in the first quarter of 2017 is predicted to push down the value of sterling against a basket of major currencies, dragging it to a 32-year low against the dollar.

The start of two years of formal Brexit negotiations with Brussels is expected to push the pound down by more than 5pc against the dollar and euro from current levels of $1.2290 and €1.1764, according to Bank of America Merrill Lynch (Baml), Morgan Stanley and Deutsche Bank.

However, the two US banks said the weakness would represent the “last leg down” for sterling, as political risks in Europe weigh on the single currency and the US Federal Reserve raises interest rates more slowly than current projections suggest.

Kamal Sharma, a foreign exchange strategist at Baml, said: “[We] believe that activation [of Article 50] will be the crystallisation of Brexit fears and the final leg lower in the pound.

Providing the UK economy remains resilient, we see it recovering through the rest of the year as Brexit fatigue sets in, as a potential deal looks more soft than hard.

Baml expects sterling to rise to $1.29 by the end of the year, while Morgan Stanley believes sterling will climb to $1.26 against the dollar by the end of next year and $1.45 by the end of 2018.

Kathleen Brooks, an analyst at City Index, expects sterling to “rise from the ashes” in 2017 amid a year of two halves.

While we expect further declines, potentially back to $1.18 in the first half of the year, we expect it to claw back losses in the second half of the year, and it could end 2017 at around $1.30 to $1.35, she said.

However, analysts at Deutsche Bank said a big inflation shock, the start of the EU exit process and hostile negotiations as Europe focuses on keeping the single currency together would push the pound down to $1.06 against the dollar and “close to parity” with the euro if the single currency remains robust against the dollar.

Oliver Harvey, a currency strategist at the bank, said sterling could plunge to as low as €1.03 against the euro, which would be the lowest since the end of 2008.

The catalyst for further weakness will certainly be Article 50, which officially starts the two year window of negotiations. We’ll probably see a slow burn rather than a huge sell-off, said Mr Harvey.

He said the triggering of Article 50 would be a potential catalyst for some negative headlines on the growth front because companies may start to move their operations abroad.

Higher inflation will also weigh on growth next year, said Mr Harvey.

The Office for Budget Responsibility, the Government’s fiscal watchdog, expects real wages to fall in the second half of next year as inflation starts to bite.

Historically in terms of UK growth, higher inflation tends to be negative because it dampens consumer spending which has been the engine of the recovery, said Mr Harvey.

While Deutsche Bank expects the Bank of England to keep interest rates on hold next year, Mark Wall, the bank’s chief economist, said there was a higher risk of the next move being an easing rather than a tightening, which would put further pressure on the pound. UBS also expects sterling to drop to parity against the euro next year.

Analysts described the adjustment in the currency as “necessary”, due to the UK’s still large current account deficit, which stood at 5.2pc of gross domestic product (GDP) in the third quarter.

It said sterling could strengthen if a soft Brexit deal where Britain secures substantial single-market access becomes likely.

Lord King, the former governor of the Bank of England, suggested on Monday that Britain could be better off leaving the single market.

I don’t think it makes sense for us to pretend we should remain in the single market and I think there are real question marks about whether it makes sense to remain in the customs union, he told the BBC.