March 7, 2018 / 12:26 AM / 2 years ago

Sterling, yoked by the dollar, to firm in run-up to Brexit

LONDON (Reuters) - Sterling is set to trade higher in a year, near $1.41, less than a month before Britain is formally due to leave the European Union, indicating currency strategists remain optimistic London and Brussels can manage a smooth exit and transition deal.

FILE PHOTO - Pound notes and coins are seen inside a cash register in a bar in Manchester, Britain September 6, 2017. REUTERS/Phil Noble/

The latest Reuters foreign exchange poll also suggests, as it has done for months, that the U.S. dollar will stay under pressure thanks in part to an abrupt souring of the U.S. fiscal position. Many say the dollar will drive sterling.

But there is plenty of room for turbulence for the pound in the interim from UK-EU negotiations. Based on one-month views from the poll the next short-term hurdle, a March 22-23 EU summit in Brussels where it is hoped a Brexit transition deal will be agreed, does not look fraught with danger.

Investors will recall that foreign exchange traders wrongly bet in the run-up to the June 23, 2016 referendum that Britain would vote to remain in the EU. Forecasters were spot-on, however, with their predictions on how much the pound would fall in the weeks after a vote to leave.

While it was on a tear in January, sterling has yet to reclaim $1.50, where it was trading just before the referendum. Only four of 55 contributors to the latest poll taken March 1-6 thought it would be trade there or higher 12 months from now.

Bank of England policymakers sound more keen to raise interest rates in coming months, but most currency strategists say that is priced in. With the British economy still lagging the rest of its peers, the risk is that the central bank will deliver fewer rate rises, not more.

Roberto Mialich, FX strategist at UniCredit, wrote in a recent note that “GBP-USD has proved to be primarily a ‘USD story’ and we imagine it will continue to do so.”

“This is because, in our view, the USD, which has rapidly closed its overvaluation gap, will weaken further this year, primarily on the back of the reshuffling of flows outside the U.S. and with the expected increase in the U.S. budget deficit representing an additional drag.”

But in the short term, with a wide gap between the European Commission’s position and Prime Minister Theresa May’s government on a litany of issues, some pessimism has returned. At $1.3860, sterling is well off its year-high above $1.43.

“Given that GBP’s decline is more Brexit-sentiment driven – rather than a reassessment of UK economic fundamentals – history suggests that GBP has the propensity to correct sharply higher on any good news,” noted ING’s Chris Turner and Viraj Patel, who had the most aggressive 12-month forecast, at $1.53.

“We’ll need a catalyst, but risk-reward favours not chasing Brexit sentiment-driven moves lower in the pound.”

Against the euro, the pound’s fortunes look decidedly flat, as they have done for many months of Reuters polls, mainly because the euro remains on an upswing against a retreating dollar. But there were no calls for parity to the euro.

Median forecasts were 88-89 pence to the euro across the horizon, with a 12-month range of 81-95 pence.

The euro is forecast to rally further against the dollar to $1.28 in a year, despite concerns an economic boom that kicked in late last year is showing signs of moderating.

Relentless pressure on the dollar is striking, especially given that euro zone inflation is slipping further away from the European Central Bank’s target and would otherwise argue for a pullback in the single currency. [EUR/POLL]

Unlike substantial positions underpinning the euro, speculators have trimmed bets in favour of sterling in recent weeks, according to Commodity Futures Trading Commission data.

Long positions from January have been knocked out and “reduces the risk of an abrupt squeeze,” according to UniCredit’s Mialich. “In turn, this offers plenty of room to GBP-USD bulls to take the field again, should the greenback fall again over the medium-term, as we expect.”

Polling by Indradip Ghosh and Khushboo Mittal; Editing by Mark Heinrich

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