The pound rejected sub-US$1.29 levels on Thursday even after the Bank of England slashed growth forecasts, indicating underlying strength. Analysts say that the pound will rally to buy US$1.40 should Theresa May secure the EU concessions needed to pass her Brexit withdrawal agreement.
The pound ended Thursday’s European session buying US$1.297, marking a significant recovery after falling to a 17-day low of US$1.285 following the Bank of England’s quarterly inflation report.
After leaving its benchmark interest rate unchanged at 0.75 percent, as widely expected, the BoE announced on Thursday it had slashed its forecast for UK economic growth for 2019 from 1.7 percent to just 1.2 percent—a level not seen since the financial crisis a decade ago. Lower growth also means that sterling-supporting increases to UK interest rates are unlikely to come quickly, if at all, in the next two years.
Against the dollar, the pound had depreciated steadily in the hours leading up to the inflation report, from US$1.294, but the sharp rejection of sub-US$1.29 exchange rates indicates underlying short-term strength for Britain’s currency.
For sterling, all now depends on how Brexit develops.
“There are still almost as wide a range of possibilities as there were the morning after the referendum,” BoE Governor Mark Carney told his audience on Thursday.
British Prime Minister Theresa May continues in her attempts to secure from Brussels the further concessions necessary to appease all in her fractured Conservative Party and to then win a majority in Parliament for her contentious withdrawal agreement. On January 16th, May sustained one of the heaviest parliamentary defeats in British political history after MPs rejected the agreement in its current form by a majority of 230.
Should the UK avert a no-deal exit from the European Union, sterling would undoubtedly rally strongly. This, however, is becoming less likely with each passing day given that the UK is scheduled to leave the bloc in only 50 days’ time.
“UK-EU negotiations are going to look like a game of poker for the next few weeks,” Societe Generale wrote last week. Analysts at the French bank expect the pound to buy US$1.50 if Brexit is cancelled, US$1.40 in the case of a soft Brexit (something akin to the current withdrawal agreement) and only US$1.20 on no-deal.
The BoE itself is in the currency forecasting game; it warned in November of sterling losses resulting from no-deal worth 15-25 percent.