Sterling to make Solid Gains This Year if Brexit Path Smoothly

Sterling is likely to gain more than eight per cent this year, if Britain and the European Union part ways amicably, according to a Reuters poll of foreign exchange strategists.

The pound has largely been ignoring economic data, instead swinging wildly on any snippet of news about Britain’s departure from the EU in less than three months.

While it has showed some strength to start the year due to dollar weakness, its performance against the Euro has been more muted.

With only a short time left, the Brexit outcome remains uncertain.

British lawmakers are expected to vote next week against a Brexit agreement Prime Minister Theresa May struck with the EU in November.

According to the report, sterling would rise around 5.5 per cent in the event of an amicable split but fall over six per cent if there is a hard Brexit.

Still, there is only a median 25 per cent probability of a disorderly Brexit, a Reuters poll predicted in December.

Almost 90 per cent of economists surveyed expect a free-trade deal between both sides.

Those economists also mostly expect the Bank of England to raise interest rates by 25 basis points to 1.0 per cent as soon as April, which would support the currency.

Ongoing doubts about the health of the world’s two biggest economies, the U.S. and China as well as a trade war between them that was hurting growth had raised questions about how high U.S. interest rates would go this year.

The dollar’s rally is largely over, according to about two-thirds of the currency strategists polled by Reuters. They said dialing back rate hike expectations had diminished the dollar’s strength.

On Wednesday, the pound rose toward 1.28 dollars after reports May was attempting to win over the Northern Irish Democratic Unionist Party in next week’s crucial vote but dropped when she failed.

Sterling also rallied on Tuesday following reports British and European officials were discussing the possibility of extending the formal exit process amid fears a Brexit deal would not be approved by March 29.

In a month, sterling would move a little from Wednesday’s levels, trading at 1.27 dollars. When Britain and the EU part ways, it would have strengthened to 1.30 dollars.

By mid-year, it would have climbed to 1.32 dollars and at year-end it wouls be more than eight per cent higher at 1.38 dollars.

“Ultimately, we assume the removal of the current Brexit uncertainty, which will prompt a period of pound appreciation as the year unfolds,” noted analysts at MUFG, who expect a sterling rally to 1.43 dollars by year end.

However, that 12-month median forecast is still lower than the 1.50 dollars, sterling was hovering around before the June 2016 Brexit referendum.

Only three of 66 analysts with 12-month forecasts expected it to strengthen past that.

Highlighting the uncertainty around the pound’s future, the 12-month forecast ranged from 1.22 to 1.59 dollars.

Against the Euro, the pound would make modest gains.

On Wednesday, a Euro was worth about 90.0 pence. In six months, forecasts are for 87.0p and in a year 86.5p.

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