Why the pound sterling could be set for a recovery

Euro coinsPhoto by Leslie Shaffer

The British pound could rise from its current cheap valuation, in part on the possibility of a smooth Brexit, Kit Juckes, head of foreign-exchange strategy at Societe Generale, said in a note on Tuesday.

“Progress has been smoother than expected, because the U.K. has capitulated on most of the demands of the Hard Brexit rebels,” he said. “[Chances of] a smooth exit from the EU have improved, which would be supportive for growth and point to more monetary policy tightening than is currently expected. Faster growth, less political disturbance and more monetary policy tightening would all be good for sterling.”

But he noted that while the pound has recovered from the sharp, post-Brexit-referendum drop, it wasn’t likely to “get anywhere near” its levels before the vote — even though its valuation is cheap compared with the past two decades and “very low” compared with the 1997-2008 period between Monetary Policy Committee independence (1997) and the Global Financial Crisis (2008).

Juckes also noted that pound/dollar shorts hit a post-Global Financial Crisis record in 2017, but that has gradually recovered.

“A return to those levels is very unlikely in the foreseeable future. Rates will rise, but will remain low. Real GDP growth may not be as bad as feared but will lag that of the Eurozone for a number of years. The current account deficit will persist,” he said. “Still, a smooth Brexit makes a move above pound/dollar 1.45 likely at some point this year and in the short-term, a break of euro/pound 0.87 could take the pair down
to 0.84,” at least temporarily.

But he noted that while the post-referendum negative sentiment has decreased, CFTC data indicate the market is very long on euros, which would make a tactical short euro/pound trade viable.

The euro/pound was at 0.8717 at 1:46 P.M. SGT and the pound/dollar was at 1.4184.