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Sterling fell by about 11% in trade-weighted terms right after the vote on EU membership. But the Pound has mostly traded in a narrow range since Theresa May took over as Prime Minister before breaking lower this week.
The Bank of England delivered a sizeable monetary policy stimulus on August 4 and also left the door open for further easing in the near future. That said, activity data have, on average, surprised on the upside over the past month, making that less likely. Short positioning in GBP remains large and, in the absence of a clear catalyst for further action from the BoE, that goes against our view of a weaker currency.
That said, we think it is too soon to think that Sterling has found its post-Brexit low. Not much data have been released to assess fully the size of the slowdown. More importantly, negotiations with the European Union have not even started and a date has not been set for Article 50 to be triggered. When negotiations do start, business confidence will also likely be eroded further if, as we expect, European leaders take a tough negotiating stance.
Against this backdrop, it may take longer for Sterling to reach the lows we are forecasting, but we still think the currency is a sell over the next 12 months.
FX Targets*:
we set our current forecast for EUR/GBP at 0.90, 0.86 and 0.80 in 3, 6 and 12 months. This implies GBP/$ at 1.20, 1.21 and 1.25 in 3, 6 and 12 months.
Things to Watch:
Exact timing for triggering Article 50, which will mark the beginning of the negotiations on the UK’s exit from the European Union, remains a key factor. Until then, it is difficult to have any clarity on the type of trade and immigration agreements the UK is likely to strike with its European partners.
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