Pound Judged Less Ugly Than Euro by Analysts Betting on Rally
(Bloomberg) -- The pound may be the winner against the euro next year in a contest of the not-so-pretty.
Neither currency has made much headway against the other this year as the U.K.’s troubles tied to its impending exit from the European Union were offset by political uncertainty on the continent. OppenheimerFunds Inc. expects the shared currency will be weighed down by a slowing euro-zone economy, while Commerzbank AG sees Britain eventually opting to delay its exit from the bloc, boosting sterling by more than 3 percent against the euro by end-March.
Sterling tread water Monday versus the euro, even as weekend news reports suggested that both a no-deal Brexit and a second referendum were still on the table as potential outcomes of the Brexit deadlock. Both OppenheimerFunds and Commerzbank are betting that rather than the U.K. tumbling out of the EU without a deal, Article 50 will be extended to allow the U.K. and EU more time to reach an agreement.
The Brexit-battered pound is now cheap by historical standards, which could help it rally harder on any positive news. The euro’s outlook has been clouded by weak data and the European Central Bank’s projection that economic risks are tilted to the downside. The common currency is also facing its own political demons, notably the Italy-EU standoff and the anti-government protests in France, and isn’t particularly immune to Brexit either.
“There is more bad news priced in for the pound than the euro,” said Alessio de Longis, who helps oversee $2 billion at OppenheimerFunds and is overweight sterling and neutral on the euro. “To the extent that our eurozone view is right, we have more slowdown ahead, more deceleration in economic activity in Europe. It’s basically who is prettier in an ugly contest.”
Oppenheimer sees sterling rallying to between 85 pence and 87 pence per euro by the end of March, from around 90 on Monday. Commerzbank predicts the pair will move to 87 in the same time frame. The median in a Bloomberg survey sees a smaller advance, and projects the pound at 88 pence at the end of the first quarter.
When the Bank of England meets this week, it’s likely to signal once again that its near-term outlook is dependent on Brexit. While a U.K. interest-rate increase is currently not priced in until 2020, a relatively positive Brexit outcome could open up room for policy tightening and further boost the pound.
With Brexit, the risk is increasing that “nothing is finalized in time and that a delay beyond the end of March is agreed with a pragmatic but reluctant-to-negotiate EU,” Kit Juckes, a strategist at Societe Generale SA, wrote in a note to clients. “Which will leave sterling, in real trade-weighted terms, bumping along the bottom of its post-Bretton Woods range, while hanging like an albatross around the euro’s neck.”
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