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Pound to Rebound Higher in 2019, Says SEB; No-Deal Brexit Unlikely

 

2019 will be a good one for the British pound, thinks a foreign exchange analyst at SEB. Recent depreciation is overdone, the analyst says, and will be corrected once markets begin to price in the improbability of a no-deal Brexit. Investors should expect a GBP/EUR rally into the mid-€1.17s or higher.

 

The British pound has been the second-best performing major currency over the Christmas period. Relative to the US dollar, sterling is showing a gain since the week ending December-14 of 1.7 percent and, at $1.28, is now at a 3-1/2-week high.

Much has been said in the media about delays to the “meaningful vote” on Prime Minister May’s withdrawal agreement and what it means for no-deal probabilities should the agreement be rejected by the House of Commons, and about no-deal impacts on the British currency. To state the obvious, nearly all of those media releases and economic analyses have worked to ramp up negativity on the pound, and this is reflected in current exchange rates. Against the dollar, for example, sterling is worth 11 percent less than it was in April.

The market is, though, far too downbeat, according to analysts at Swedish bank SEB, who join a growing collective of experts believing in the improbability of a no-deal Brexit. As a result of negativity, sterling is significantly undervalued.

“We don’t expect a hard Brexit,” says SEB’s Richard Falkenhäll.

“Tory hardliner Brexiters will at some point realise [May’s] deal might be the only way forward.

GBP to EUR - 3 month chart to 31 Dec
GBP/EUR - 3 month chart to 31 Dec

“Parliament will have to make a decision to stop a no-deal withdrawal before March-29. All other outcomes other than [no-deal] will likely strengthen GBP from its current level.”

To agree to May’s deal would be to walk sterling away from the proverbial cliff edge, says Falkenhäll, and would lead to “a significant recovery.”

Even if the withdrawal agreement is rejected by British MPs, there remains the option to push back the exit date beyond March to allow for further negotiations, or to hold a second referendum, both of which would increase the likelihood of the UK remaining in the EU—undoubtedly the best-case scenario for UK markets, and one that might add 15 percent to sterling’s value within a short period of time.

With all that said, SEB expects significant sterling appreciation in 2019, with a target for GBP/EUR—economically the most important pound exchange rate—of €1.1765 (EUR/GBP £0.85) based on the current withdrawal agreement being passed. Should Brexit be cancelled, however, considerably more upside is likely.

Though SEB declined from offering a GBP/USD forecast, under its assumptions a 2019 rally into $1.37-$1.40 territory seems reasonable.

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