In World Economy News 02/12/2016
The British government will start official divorce proceedings from the European Union early next year, according a Reuters poll of foreign exchange strategists, who also said sterling’s slide since June’s Brexit referendum is not yet over.
Following Britain’s decision to leave the EU, Prime Minister Theresa May said she intends to trigger Article 50, which starts the two-year countdown to leaving, before the end of March.
Twenty of 27 strategists who answered an additional question in the monthly Reuters poll taken this week – none of whom were based in Britain – said policymakers would stick to that schedule. All major British banks declined to answer.
“Hard to go back on their word now,” said Benjamin Reitzes at BMO, based in Toronto.
The wider poll of over 60 forecasters suggests sterling – which fell about 20 percent after the referendum and has recovered slightly to be down a bit more than 15 percent – has further to fall.
Worries since the referendum that May will prioritise restricting immigration over promoting trade, at the potential expense of Britain’s continued access to Europe’s single market, has whacked sterling.
But the pound jetted to an almost three-month high in trade-weighted terms on Thursday, adding to its biggest monthly gains against the euro since 2009, after Britain’s Brexit minister said it would consider paying into the EU budget for access to the single market.
Currently trading around $1.26, forecasts were little changed from a November survey. One pound will be worth $1.23 in a month and just $1.21 in six, according to the latest poll. It will have nudged up to $1.22 in a year’s time.
Last month’s poll said it would sink as low as $1.15 once Article 50 is triggered.
“The forecast for a lower sterling comes from two sides. Both sides of the cable equation point to it moving lower,” said Nick Parsons at NAB.
“We see a stronger dollar through the first half of next year and we also see ongoing uncertainties around the UK economy and Brexit continuing to pressure the pound.”
Offering support to the dollar, the U.S. Federal Reserve is expected to tighten monetary policy this month, putting it out of step with most of its global peers, and is likely to follow with several more hikes in 2017.
The Bank of England, meanwhile, has adopted a neutral policy stance after cutting its benchmark interest rate to a record low of 0.25 percent after the referendum. It now is not expected to ease policy further as the country instead relies on fiscal policy.
So far, Britain’s economy has performed better than expected since the vote to quit the EU and sterling has steadied.
Last week, the pound racked up its longest run of weekly gains against the euro since early 2015, helped by a good recent run of data as well as worries about political risk on the Continent.
But sterling is expected to struggle against the common currency going forward, despite increased calls for the euro to fall to parity to the U.S. dollar or below.
One euro was worth about 84.7 pence on Thursday, but in a month’s time it should get you 86.0p, the poll found. In six months, euro-sterling will be trading at 86.4p and in a year 87.1p, the poll predicted.
Source: Reuters (Polling by Sujith Pai and Shrutee Sarkar; Editing by Ross Finley, Larry King)
