The Pound May Have Fallen But Bulls Are Keeping the Faith

(Bloomberg) -- Even in this dark hour, the pound isn’t without allies.

Sterling slumped more than 4 percent in the past three months, spurring a slew of forecast cuts by analysts amid rising risks that the U.K. will tumble out of the European Union without an economic deal. Still, pound bulls are keeping the faith, with Investec Bank Plc estimating that the two sides will reach an agreement by year-end, while ECU Group Plc sees long-term value in the currency.

The Pound May Have Fallen But Bulls Are Keeping the Faith

The pound is on track for a fifth monthly drop and touched a 14-month low of $1.2662 earlier this month, with a series of positive U.K. economic reports doing little to bolster the currency. Sterling has been weighed down in recent months by a stronger dollar and the fear of a no-deal Brexit -- Foreign Secretary Jeremy Hunt reiterated warnings of such an outcome Tuesday while Fitch Ratings has called it a growing possibility.

“Our baseline case is still that there will be a deal between the U.K. and the EU and that Prime Minister Theresa May will still be in Number 10 Downing Street at the end of 2018,” said Philip Shaw, chief economist at Investec. “On that basis, it is easy to see sterling recovering, perhaps through the $1.30s, if not $1.40.”

Still, Investec sees the pound rising to $1.40 by the fourth quarter of 2018 and to $1.41 by the first quarter of 2019. The median estimate for Dec. 31 in a Bloomberg survey of currency analysts is $1.32. The U.K. currency gained as much as 0.4 percent Tuesday, rising for the fourth day as the U.K. and the EU resumed Brexit negotiations in Brussels.

‘Buy Sterling’

ECU Group Chief Executive Officer and Brexiteer Michael Petley says the U.K. currency is undervalued “by almost any single measure.” Any temporary decline in sterling between now and the U.K.’s exit will be compensated for by its appreciation in the long term, he said.

“I would suggest that people buy sterling and that at any hysterical knee-jerk reaction they buy more,” Petley said.

The market doesn’t appear to be taking that advice just yet. The latest positioning data from the Commodity Futures Trading Commission shows leveraged funds remaining the most bearish since September 2017, with both hedge funds and asset managers adding to short positions.

Even a Brexit deal that’s perceived as economically harsh would see sterling rally temporarily, according to Principal Global Investors strategist Seema Shah. Reaching an agreement for closer ties with Europe by December could boost the currency back toward $1.35, she said in an interview.

‘Stay Volatile’

Not everyone is convinced Brexit uncertainty will be resolved so easily. Danske Bank A/S recently revised down its year-end pound calls to $1.27 from $1.41.

A deal is more likely to be struck in December than October, meaning that investors will have to wait until the end of the fourth quarter to see the U.K. currency recover, according to Mikael Olai Milhoj, a senior analyst at the bank.

“Until we get more clarification, we believe the pound will stay undervalued and volatile,” said Milhoj, who sees sterling rising to $1.40 in six months’ time.

©2018 Bloomberg L.P.