Optimism grows over sterling's performance against the dollar, poll shows

The poll found an even split on how views on the pound against the euro had changed

'Markets are no longer expecting (US President Donald) Trump's 3 per cent growth forecast to come to fruition,' said Jane Foley at Rabobank (Reuters)

Foreign exchange strategists are now more optimistic about sterling against the dollar than they were at the start of 2017, with a majority becoming either less bearish or more bullish, a Reuters poll found this week.

But they were evenly split on how views on the pound against the euro had changed, with an equal number becoming more or less bearish. There was a similar trend as to whether they were more or less bullish.

“A lot of the reflationary expectations that were built into the dollar at the end of last year have been revised lower,” said Jane Foley at Rabobank. “Markets are no longer expecting [US President Donald] Trump's 3 per cent growth forecast to come to fruition.

“We weren't forecasting that the eurozone economy would be as strong as it has been this year. We had some euro strength but not enough,” said Ms Foley, who is now more bearish on sterling against the euro.

Britons voted last June to leave the European Union, and as Reuters polls predicted beforehand, the pound fell after the referendum.

A year later, sterling is still down around 10 per cent against the dollar and 13 per cent against the euro. But it is not expected to weaken much more.

Median forecasts in a Reuters poll of around 60 strategists taken in the past week predicted the pound would be little changed from current levels at $1.29 in a month, dip to $1.28 by end-September and then to $1.27 six months later.

Those spot predictions were little changed from a June poll.

Against the single currency, the pound is expected to barely move over the forecast horizon. Forecasts are one euro will be worth 88.00 pence through 2017 and 88.25p in a year's time.

Soon after the referendum, the Bank of England (BoE) cut interest rates and restarted its quantitative easing program to support an economy expected to slump. But until recently at least, the economy has fared better had been feared.

However, sterling's slide since the vote has driven inflation well above the Bank's 2 per cent target, and last month three of the Bank's eight monetary policymakers voted for a rate increase.

“In the medium term, the BoE’s lower tolerance for inflation means downside room for UK real yields is now much more limited. This means downside room for sterling is also more limited,” Jordan Rochester and Yujiro Goto at Nomura said in a note.

One of the three policymakers has since left the BoE and few economists expect the central bank to tighten monetary policy anytime soon. Instead, they are waiting to see how the EU divorce talks progress.

There has so far been little clarity on that front. After Prime Minister Theresa May lost her parliamentary majority in a snap election in June, what approach the UK government will take to Brexit negotiations is even less clear.

Reuters

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