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Sterling Nears 5-Month Low Versus Euro

The UK economy is shrinking, as is the pound, which is buying less than 1.12 euros for the first time since mid-January. Investors are becoming increasingly unsettled over Brexit, particularly with Boris Johnson a hot favourite to become the UK's next prime minister.

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The British pound slipped below €1.12 on Tuesday in spite of ONS data showing unemployment steady at multi-decade lows and better-than-expected earnings growth of 3.1 percent.

A quote of €1.1195 was the pound’s lowest level against the euro in nearly five months, though it had recovered by the start of Tuesday’s US session to levels near €1.122.

Investors are steering clear of sterling following Monday’s surprising (and more important) data which outlined just how significant the consequences of Brexit paralysis have been: the UK economy is shrinking, the ONS has said, with the latest figures showing economic contraction for a second consecutive month, this time by 0.4 percent for the month of April.

Pound valuations will, of course, continue to fluctuate based on No-deal, Deal and Remain probabilities.

The latest betting patterns in the UK reflect an increased likelihood of Boris Johnson — an ardent Brexiteer and no-deal supporter — becoming the UK’s next prime minister. One analyst told The Telegraph two weeks ago that a Johnson premiership would result in further pound depreciation worth 4–5 percent. In recent weeks, British bookmakers have slashed the odds on Mr. Johnson becoming PM from a general 7/4 to levels between 1/2 and 4/6, implying a 60–66.67 percent chance of him winning the keys to Number 10.

“Our economists believe the risks of both a hard Brexit and Remain have increased,” said Morgan Stanley’s Hans Redeker this week. However, several banks, including ING and Goldman Sachs, continue to play down the risk of no-deal, thereby suggesting that the pound is undervalued.

Although “ongoing uncertainty may continue to weigh on the pound,” per Morgan’s Redeker, any near-term currency weakness is likely to be limited given the presence of surprisingly hawkish rhetoric from the Bank of England.

GBP to EUR - 1 Week chart to 11 Jun
GBP/EUR - 1 Week chart to 11 Jun

“We probably would have to return to something like a neutral stance earlier than markets project,” BoE Monetary Policy Committee member Michael Saunders said in a speech at Solent University on Monday. “I want to stress that the MPC does not necessarily have to keep rates on hold until all Brexit uncertainties are resolved,” he added.

The stance taken by central bankers in the UK contrasts starkly with those being taken elsewhere in the world. In recent weeks, central banks in Australia, the US, New Zealand and India have either cut interest rates or hinted at cuts in the months to come. Since interest rates are the principal drivers of foreign exchange rates, this is to the pound’s advantage.

With such obvious political uncertainties in play, precise GBP forecasts are hard to come by. Among those to offer forecasts for June are the team at TradingEconomics.com, whose proprietary macro model expects GBP/EUR marginally higher by month-end at €1.126.

 

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