FX round-up: Some analysts diverge in their outlook for the pound

Alexander Bueso Sharecast | 19 Apr, 2017 19:28 | | |

Money coins pound

Cable fell prey to profit-taking on Wednesday as traders pondered the next move in the pair, alongside remarks from rate-setters on both sides of the Atlantic which highlighted the policy divide between the US Federal Reserve and the European Central Bank.

As of 1900 GMT the pound was down by 0.41% to 1.2789 and off by 0.28% versus the euro at 0.8377 with GBP/yen just slightly ahead, ekeing out gains of 0.02% to 139.22.

Analysts continued to weigh in with a steady stream of views on the pound after Prime Minister Theresa May's decision the day before to call snap elections for 8 June.

By and large, the prevailing view is that the risk of a "disorderly" exit from the European Union has fallen, because a bigger Tory majority in Parliament will give her more flexibility to reach whatever deals might become necessary. It will also give the UK more time to properly negotiate and set-up transitional arrangements before the next general elections.

However, analysts were somewhat more divided on their assessments of whether a Conservative victory means that a hard Brexit is more or less likely.

"The impact of a victory for May on future trade is still very uncertain, as it increases her mandate to press ahead with her hard-line Brexit plans, but might also increase the room to make concessions to the EU to secure future free trade," said Carlijn Prins at Rabobank.

From a technical standpoint, analysts at Digital Look believed the pair would likely resume its rise towards the levels last seen in September, between 1.3440 and 1.35.

On a more 'contrarian' note, Naeem Aslam, chief market analyst at Think Markets, said: "Another reason that we think that the current rally in sterling could fade is that there is still a lot of time between now and the 8th of June, and it is almost certain that the race to Number 10, Downing Street will not be an easy one.

"In the coming weeks, we are expecting the polls to start narrowing as her contenders start their campaigns. The United Kingdom is a divided country and many would take this as another opportunity to derail the Brexit process. If that happens, we could see the currency tumbling once again."

Meanwhile, the Aussie is slipping lower, retreating 0.83% to 0.7498, with Michael Hewson, chief market analyst at CMC Markets attributing that to Tuesday's 'dovish' policy meeting minutes from Australia's central bank.

Back among the major currency pairs, the spot US dollar index was seeing a slight bounce, gaining 0.29% to 99.79.

To take note of, speaking in the afternoon Federal Reserve bank president Eric Rosengren said the process of unwinding the central bank's balance sheet could begin "relatively soon".

For Rosengren, a policy of slowly allowing the balance sheet to begin shrinking should not impact the necessary pace of interest rate normalisation by much.

Earlier in the day, European Central Bank Governing Council member Benoit Coeure sounded a cautious note on growth prospects within the single currency bloc.

"In the very short term, Q1 and Q2, there are some upside risks," Praet said according to a report from Reuters.

"But looking beyond, I see downside risk prevailing."

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