Pound sterling and the euro hover above their post-Brexit lows. Reuters
LONDON: How Britain's divorce negotiations with the European Union progress will decide whether sterling sinks possibly as low as US$1.10 or bounces as high as US$1.50 in the coming year, a Reuters poll of foreign exchange strategists found.
The pound is down well over 10% since the surprise referendum vote on June 23 to leave the EU, following a short-term move in the currency that was correctly predicted by Reuters polls. It was trading around US$1.248 earlier on Thursday.
If the divorce negotiations turn fractious, sterling will fall to US$1.17, according to the median view. Several analysts said it would sink to US$1.10 - a level not seen since 1985, just before the United States devalued the dollar.
Conversely if talks run smoothly, the median forecast was for it to bounce to US$1.30 - still below where it was trading at ahead of the June 23 referendum - although one respondent said it would soar to US$1.50.
"Sterling is not very closely linked to interest rate expectations at the moment - it's really whether there is a soft or a hard Brexit driving sterling, and that is going to continue for a year or so," said Samuel Tombs at Pantheon Macroeconomics.
Prime Minister Theresa May triggered Article 50 last week, starting a two-year countdown to Britain's departure from the EU, which it joined in 1973.
So far there is little clarity on what tone the talks will take, but concern over immigration from other EU member states was a major reason behind the leave vote and May has said she will respect those fears by halting freedom of movement.
Such a move would probably lead to denial of access to Europe's single market, hurting trade.
May has said "no deal is better than a bad deal" and that she is prepared to walk away from the talks. But a parliamentary committee said earlier this week May must prove that by offering an assessment of the economic impact of leaving the EU with no agreement.
RANGE-BOUND FOR NOW
According to the regular poll of over 60 foreign exchange strategists taken in the past week, sterling will trade between US$1.22 and US$1.24 in the next 12 months. Those medians were little changed from a March poll.
"While we believe headline risk will keep the market's bearish sterling bias intact this year, a stronger structural position supports our view of some sterling recovery in 2018," said Vassili Serebriakov at Credit Agricole.
Sterling is likely to come under pressure from interest rate hikes in the United States. The Federal Reserve is expected to follow up on a March increase with two more rises later this year while the Bank of England is not expected to move until 2019 at least.
Across the channel, the European Central Bank will also be maintaining its ultra-loose monetary policy stance for the foreseeable future and the euro faces its own headwinds in the coming months.
Elections in Germany and possibly Italy could harm the euro project while a win for the far-right National Front candidate Marine Le Pen in the French presidential race could precipitate an eventual end to the common currency altogether.
With French opinion polls suggesting Le Pen is unlikely to take up residence in the Elysee Palace, the Reuters poll found a shock victory for her would trigger an immediate 5% fall in the euro against the dollar.
Medians show one euro will be worth 86p in a month and 88p in six months and a year, slightly more than predicted in the March poll. Earlier on Thursday a euro was worth 85.5p. - Reuters
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