Pound’s Fortunes Not So Bad After All to Top Currency Forecaster
The bank increased its year-end sterling forecast to $1.29, little changed versus current levels, from $1.21. It remains bearish longer term, projecting the pound to end 2018 at $1.21. While sterling’s immediate outlook looks relatively calm, the currency will face headwinds next year as negotiations on Britain’s exit from the European Union risk deterring investment into the U.K., the Swiss bank said. The median forecast in a Bloomberg survey of analysts is for the pound to end the year at $1.28.
“The major reason is the behavior of the new government, which is taking its time when it comes to the Brexit negotiations,” said David Kohl, Julius Baer’s Frankfurt-based head of foreign-exchange research. “The rationale for our negative pound forecast had always been the U.K. current-account deficit, which has been so far financed by foreign direct-investment flows. Our question is how quickly these direct-investment flows dry up.”
Before the EU referendum in June, Julius Baer was among the most pessimistic on sterling’s prospects, predicting a 30 percent plunge in the currency in the event of the “Leave” camp winning. Sterling dropped as much as 14 percent to its lowest since 1985 within two weeks of the Brexit vote.
The bank sees the U.K. currency falling even below that level. “We expect uncertainty in the negotiations for a start,” Kohl said. “We will get more details on which industries might suffer and we will get first reactions on the foreign direct-investment front.”
Economists expect a further interest-rate cut later this year and see the rate of economic expansion falling to just 0.7 percent in 2017, from 1.7 percent this year, according to surveys by Bloomberg. This would be the worst performance since the 2009 recession.
The pound was little changed at $1.2969 as of 4:12 p.m. London time, and earlier fell to $1.2946, the lowest level since Aug. 16. Sterling dropped in the previous two weeks versus the dollar, after a three-week winning run. Britain’s currency was little changed at 85.95 pence per euro, after reaching the weakest in almost a month the previous day.