Analysts divided over course of pound against euro
Political risk on both sides of the English Channel evident
LONDON: For analysts trying to plot the course of the pound against the euro in 2017, the key decision is judging which side of the English Channel will see greater political turbulence.
Strategists are trying to pinpoint whether the UK’s exit process from the European Union (EU) or the rise of populism in the rest of Europe carries the bigger risk.
The dichotomy is evident in Bloomberg’s survey of currency analysts, where the range between the highest and lowest year-end forecasts for euro-sterling is the widest going into a new year since at least 2006.
With central banks buying bonds and suppressing borrowing costs, currencies have become the main way investors reacted to political risk in 2016.
Sterling is on track for its biggest annual decline against the euro since 2008, and the median forecast in a Bloomberg survey of economists sees the pair reaching 86 pence by the end of next year, with a range of 73 pence to one pound per euro.
“Clearly there’s a lot of political risk on both sides of the English Channel over the course of the next 12 to 24 months,” said Jeremy Stretch, head of Group-of-10 foreign-exchange strategy at Canadian Imperial Bank of Commerce in an interview earlier this month. “The legacy of 2016 will be that traditional presumptions in terms of politics and political risk have been turned upside down.”
While the pound plunged to its lowest level versus the dollar in more than three decades after the UK voted in June to leave the EU, recent economic data have proven resilient. That’s prompted BlackRock’s deputy chief investment officer of global fundamental fixed income, Scott Thiel, to be positive on sterling.
“So long as we don’t go down the road of a hard Brexit, the pound will continue to react relatively favourably,” he said at a media Currency turmoil: briefing this month.
The UK currency may also benefit from political turmoil across Europe. France’s National Front leader Marine le Pen, who wants to take the nation out of the euro, is likely to enter the two-person run-off vote for the presidency in May, polls show. In the Netherlands, far-right politician Geert Wilders is leading in the polls, despite being found guilty of inciting discrimination this month. Meanwhile, Italy faces both general elections and a referendum on labor reform. Some analysts say this means the euro may suffer more than sterling.
“Through the first half of next year, we think the main story will be that the pound benefits from the market’s focus switching more toward the political risk in Europe,” said Lee Hardman, a foreign-exchange strategist at MUFG, in an interview earlier in December. “The pound could benefit relative to the euro as it looks comparatively safe during that period.” He forecasts the euro will drop below 80 pence during the first half of 2017, a level not seen since Britain’s decision to quit the EU became known.
The pound may also be underpinned by any delays to Article 50 of the Lisbon Treaty, which will start the process of Britain leaving the EU, according to BlackRock’s Thiel. Prime Minister Theresa May has pledged to start the Brexit process formally by the end of March, a deadline which Thiel said was “challenging.” – Bloomberg