A collection of five, ten, twenty and fifty British pound banknotes sit in this arranged photograph in London, U.K. (Photographer: Miles Willis/Bloomberg)

Pound Set for Big Rally as Brexit Deal Approaches, Jen Says

(Bloomberg) -- The U.K. is close to reaching a deal on Brexit, setting the stage for a potentially historic appreciation of the embattled pound, according to hedge fund executive Stephen Jen.

“An imminent deal is overwhelmingly probable,” wrote the chief executive of London-based hedge fund Eurizon SLJ Capital in a note Tuesday. “The chances of a no-deal hard Brexit are very low, and a deal in the coming weeks will likely allow the pound to rally.”

Sterling is “very under-valued and under-owned,” Jen said. “It is still reasonable to view 1.55 as a valid fair value and the center of gravity for cable,” he said, using the trader term for the pound-dollar exchange rate. That would be a 17 percent surge from the $1.3198 it traded at as of 4:11 p.m. London time.

Pound Set for Big Rally as Brexit Deal Approaches, Jen Says

With just a week before a crucial summit of European Union leaders that could determine the outcome of Brexit, optimism is growing a deal may be in sight. British and EU officials are locked in talks in Brussels over a compromise that could see the U.K. remain temporarily in the EU’s customs regime, people familiar with the negotiations have said.

On the Mend

Hopes for a deal already have helped the pound gain almost 4 percent since mid-August, paring its decline for the year to 2.3 percent. The currency will strengthen as it passes through “each tunnel” on the route to Brexit, Jen said.

He expects a rally to $1.35-$1.38 in the short-term as Britain agrees the terms of the divorce deal with Brussels. Jen then sees it touching $1.38-$1.45 as the details of the trade relationship with the EU become clearer, with another leg higher to $1.45-$1.55 set to come as Britain enters negotiations with the rest of the world.

After it leaves the union, Britain’s challenges will be daunting, but perhaps more predictable and more within its own control than the EU talks have been, according to Jen, a former International Monetary Fund economist.

Calling “Doomsday forecasts” misguided, he said the U.K. has “ample” soft power to deal with its future once it is able to negotiate trade deals with countries such as the U.S., China, Japan, Canada and Australia, which collectively account for 22 percent of its exports -- versus 42 percent and falling for the EU.

“The pound may be volatile in the short-term, but its positive long-term outlook is more certain than many other Group-of-10 currencies,” he said. “The upside is substantial, against both the dollar and the euro.”

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