Sterling to fall further, analysts warn
Sterling is set to plunge further against the dollar in the medium to long term due to the uncertainty following the U.K.’s vote to leave the European Union. In fact, the currency is expected to hit $1.25 sooner than later, a number of analysts told CNBC.
“I have a 1.25 forecast for GBP/USD over the next three months. If the data remains weak, that forecast risks being revised further lower,” Jeremy Stretch, head of G10 FX strategy at CIBC Capital Markets told CNBC via email.
“The recalibration of macro assumptions post-Brexit has yet to force the Bank of England to forecast annual negative growth. However, the scale of the immediate growth revisions has prompted an aggressive policy response, in large part as the bank attempts to get ahead of what is expected to be increasingly weak real economy data.”
Stretch explained that if the data confirm the worst fears, then the BOE will again swing into action in November — which could lead to a further revision of sterling.
Sterling suffered session lows against the dollar, off by more than 1.5 percent, after the Bank of England cut interest rates for the first time in seven years by 25 basis points to 0.25 percent. The BoE also announced a new Term Funding Scheme worth up to £100 billion and purchase of up to £10 billion in U.K corporate bonds. A £60 billion hike in the bank’s government bond-buying program, known as quantitative easing, to £435 billion was also announced.
Currency volatility was at its highest after the Brexit vote, with dramatic moves in sterling from $1.50 to a 31-year low of $1.32. While it continues to remain under pressure, sterling is currently trading a touch above the dollar at $1.31 levels.
The decision from the BoE on Thursday saw sterling down to $1.31 levels, a move that the BoE’s deputy governor Dr Ben Broadbent saw as “relatively small.”
Speaking to BBC radio on Friday morning, Broadbent said the pound’s drop after the BoE’s decision on Thursday was relatively small compared with its fall after the June vote to leave the EU.
He said he was pretty confident the BoE’s stimulus package would have some effect and that he did not agree the central bank’s actions reflected panic.
Uncertainties ahead?
But with the U.K. economy heading into an even lower interest rate environment and uncertainties about Brexit loom, analysts say sterling will continue to fall.
“Heightened political risk and economic uncertainty will prevent a strong recovery in sterling in the near-term, even if the economic outlook brightens,” Kallum Pickering, Senior U.K. economist at Berenberg told CNBC via email.
“When the Brexit divorce negotiations begin to bear fruit, thereby reducing economic uncertainty, sterling should then start to return to more normal levels.”
However some analysts think we are beginning to see some reprieve in sterling which may last few months but it will head lower again. Craig Orlam, Senior Market Analyst at Oanda told CNBC that the trigger for this could either be more BoE stimulus, the triggering of Article 50 or more deterioration of the U.K. economy.
“Prior to that, $1.31 (in GBP/USD) may continue to offer significant support, as it did before and after the BoE announcement, while $1.35 could provide a ceiling to the upside,” Erlam said, adding, “I do see $1.31 being broken and the pair trading back around $1.28 post-Brexit lows and possibly towards $1.25. Although we may need to wait as long as early next year for this.”
Source: CNBC
