GBP: Bumping along the bottom – SocGen

Sterling has fallen significantly since the Brexit referendum, and with a slow but gradual loss of momentum in economic growth, it lacks drivers for a recovery, according to analysts at Societe Generale.

Key Quotes

“Still a laggard. Our mid-year forecast looked for GBP/USD and EUR/GBP to reach 1.29 and 0.90 respectively by September 2017. Because EUR/USD has risen a bit faster than we expected, GBP/USD has been dragged along on its coattails, and EUR/GBP closed at a fresh cycle high earlier this month. But the basic story hasn’t changed.”

“More upside potential in EUR/GBP. On a one-year basis, we can’t really see that changing. If EUR/USD gets a lot higher than we expect, GBP/USD and EUR/GBP will likely also rise as sterling loses out to a stronger euro but gains against the dollar. But if EUR/USD is around 1.25-1.30 in 4Q18, a 6% gain, looking for a 2-5% gain in EUR/GBP and a 1-4% gain in GBP/USD seems about right. That points to a pretty range-bound currency.”

“Recent rally should soon fade. The MPC is sounding more hawkish and will likely become more so if pressure for wage increases pays off in the public sector. The market has started to price in a BoE rate hike in 1Q18. But growth momentum is weakening as households suffer a real income squeeze and businesses delay investments because of Brexit fears. Moreover, there has been a marked lack of progress in the Brexit negotiations.”

“Brexit remains a key risk. Sterling is undervalued from a long-term PPP-model perspective. However, the risk remains that ‘Brexit’ is managed badly and acts as a brake on potential growth for many years to come. The GBP/SEK and GBP/NOK downtrends still have plenty of room to run over the longer run in our view.”