May 10, 2018 / 12:45 AM / 2 years ago

Sterling's recent pounding over, set to bounce back - Reuters poll

LONDON (Reuters) - Sterling’s recent slide is a blip and the currency will bounce back over the coming year, once again approaching pre-Brexit referendum levels, according to a Reuters poll of foreign exchange strategists.

An English ten Pound note is seen in an illustration taken March 16, 2016. REUTERS/Phil Noble/Illustration/File Photo

Predictions the Bank of England would raise rates this month helped the pound become one of the best performing currencies this year but that accolade has disappeared in recent weeks - alongside nearly all calls for a May hike.

The pound fell to a fresh four-month low on Tuesday as the dollar extended its rally and investors trimmed pound holdings before Thursday’s BoE meeting, when the central bank is now expected to keep interest rates on hold.

Trading around $1.36 on Wednesday, cable will be at $1.37 in a month, $1.40 in six months and $1.42 in a year.

Those median forecasts in the May 3-9 poll of around 60 foreign exchange strategists are a touch weaker than the survey taken in April, suggesting most are clinging onto previous views despite the 7 cent-plus plunge over the last few weeks.

“Sterling looks oversold right now (and) providing Brexit talks don’t go too badly, markets should price out some of the tail risks still embedded in it,” said Philip Shaw, chief economist at Investec.

Net trader positioning on sterling was still short last week, according to Commodity Futures Trading Commission data, although less than the prior week. Asset managers’ net position was more neutral.

At the start of 2016, when it looked like a majority of Britons would vote to stay in the European Union, sterling was trading around $1.50 but as the referendum approached and the Leave campaign gathered support, the currency weakened.

After the surprise outcome the pound slumped further - as correctly predicted in numerous Reuters polls.

But hopes of a smooth departure from the EU, expectations for a rise in the bank rate, and a dollar hit by a growing U.S.-China trade row, restored some strength earlier this year.

However, on Tuesday Britain’s upper house of parliament inflicted another embarrassing defeat on Prime Minister Theresa May’s government, challenging her plan to leave the EU’s single market after Brexit.

This is the 13th time in recent weeks the government has been defeated in the House of Lords on draft legislation that will formally terminate Britain’s EU membership in March next year.

Lawmakers will have to decide later this year whether to back the government or reject the law - with the risk Britain could crash out of the EU in 2019 with no deal in place.

Still, there is only a median 20 percent chance of a disorderly Brexit, in which no deal is reached, a Reuters poll found last month.

“If there is a major sticking point it is theoretically possible that the UK crashes out without a deal and a transition period. No one thinks that is going to happen, and there are some very good reasons to suggest that it will not, but it is not completely impossible,” Shaw said.

Highlighting some of that uncertainty, the 12-month forecast ranges versus the dollar and euro widened from April.

Against the common currency, the pound will weaken slightly. On Wednesday a euro was worth 87.4 pence and in a year’s time it will get you 88.3p.

Polling by Mumal Rathore and Anisha Sheth; Editing by Ross Finley/Mark Heinrich

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