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Pound Sterling June Outlook: Weighed Down, but Beware the Good News

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- Politics to be key anchor on the Pound over mid-year

- But, European summit at end-June could see some last-minute Brexit negotiation progress

- Economic data could also impress and offer Sterling an unexpected boost

London exchange rates

© Massimo Usai, Adobe Stock

Following a tough month, don't expect any mid-summer sunshine for Pound Sterling say foreign exchange strategists who warn the currency will likely find the going to be tough in June as Brexit negotiations enter a "more crucial phase".

"There will be additional Brexit uncertainty in the coming month as negotiations enter a more crucial phase. The heightened uncertainty will remain a weight on the Pound through most of June," says Lee Hardman, a foreign exchange strategist at global investment bank MUFG's London office.

The British Pound has weakened sharply against a host of currencies in May thanks to delayed Bank of England interest rate rises and growing concerns over the state of Brexit negotiations; Sterling is currently over 2.5% down against the US Dollar, 2.8% against the Australian Dollar and just over 3.5% against the Yen.

The only bright spot for the Pound is against the Euro where the exchange rate remains relatively stable and as we approach month-end the market is currently seeing gains of just over 1%.

Of late Brexit negotiations have sought to focus on the future customs relationship; and the UK has found little leeway forthcoming from the European side of the table which suggests to some commentators that the risks of the UK walking away from the table have grown.

Catherine Stephan, a research analyst at Paris headquartered global investment bank BNP Paribas, is also eyeing tough weeks ahead for the currency, noting the UK to be just ten months away from the official date for withdrawing from the European Union and political uncertainty remains extremely high.

"The agreements that have been reached so far are still vague concerning such major issues as the handling of Northern Ireland," says Stephan, "under this environment, it is hard to predict the most likely Brexit scenario. Moreover, as time passes without any concrete progress, it only reduces the probability that an overall agreement will be reached that is satisfactory for all parties."

The Pound has lost notable ground to the US Dollar over recent weeks, but it could even start to lose ground against the Euro, which as we have already mentioned is one currency that Sterling has been able to hold its ground against, until now.

“We see scope for concern about the progress of Brexit trade talks to weigh on the Pound and see risk for EUR/GBP to edge towards 0.89 on a 3 month view. That said, it is our house view that the bones of a free trade deal will be in place by March 2019. We expect that this should spark a push back to 0.84 on a 12 month view,” says Jane Foley, an analyst with Rabobank.

EUR/GBP at 0.89 gives a Pound-to-Euro exchange rate of 1.1235 while 0.84 gives an exchange rate of 1.19.

But, it's not just Brexit that has currency watchers warning Sterling will struggle over the near-term, the economy and expectations for future rises in the Bank of England's base interest rate could weigh too.

BNP Paribas' Stephan notes, "the economy has slowed: growth is sluggish at a time when Sterling has depreciated and inflation is on the rise. This has resulted in a very cautious monetary policy and the postponement of fiscal adjustments."

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But, Beware Good News that Could Boost Sterling

One truth learnt after years of covering foreign exchange markets here at Pound Sterling Live is that just as consensus is comfortable with a directional assumption on a currency, an about-turn occurs.

Remember how markets got burnt by the Pound in April - heading into April there was widespread agreement that April tends to be a positive month for the Pound on the basis of favourable seasonal trends; it has risen each April for the past decade with analysts suggesting there is an increase in repatriations of external capital by UK nationals at this time of year.

Sterling fell in April 2018.

As such, we expect foreign exchange markets to maintain their ability to surprise in June and therefore readers should be aware of where positive surprises for Sterling might arise.

Keep in mind that June sees the European Council meeting on June 28 and 29 which is seen as an unofficial deadline for the current round of Brexit negotiations to deliver progress. What the negotiating process has taught us to date is that the EU and UK have a habit of getting their act together before these key events, and therefore some good news on progress might just emerge in the run-up to the event.

This would be good for Sterling as markets would start to finally see the end to the whole saga on the horizon.

Aside from Brexit, we note there are a good number of economists - Bank of England included - who are anticipating a turnaround in fortunes for the UK economy on the belief that the slowdown witnessed in the first three months of the year is ultimately a blip.

Indeed, the Pound received some good news last week for the first time in a while when the release of the latest UK retail sales report revealed a stronger than expected rebound in April.

The ONS reported UK retail sales grew 1.4% on an annualised basis in April, well ahead of market expectations for a reading of 0.1%. The monthly number read at 1.6%, more than double the consensus expectation for a reading of 0.8% to be delivered.

Inflation data disappointed Sterling bulls last week after it was shown to have fallen faster than analysts were expecting; the rule-of-thumb being that increasing inflation gives the Bank of England cause to raise interest rates, which in turn increases foreign demand for the Pound.

However, analysts are in agreement that inflation might just have reached a nadir, and therefore it will start to tick higher in coming months which should boost the case for an interest rate rise at the Bank of England, potentially in August.

MUFG's Halpenny is keen to remind readers the Bank of England would like to see further evidence of a pick-up in growth in Q2 before deciding to raise rates again as soon as in August. "Market participants have also understandably become more cautious about pricing in further tightening in the near-term after being burned recently by the BoE’s failure to follow through on previous plans to hike rates earlier this month," adds the analyst.

Viraj Patel, a foreign exchange analyst with ING Bank N.V. says it is his belief that there are four developments in his books that would make current levels in Sterling a buying opportunity:

1. UK politics doesn't get messier from here
2. UK activity rebounds in 2Q18 / inflation stays sticky above 2%
3. Global markets weather the current storm
4. BoE hikes in August

So while points 2, 3 and 4 could well be met, the leading concern we share with other analysts is point 1; it could all come down to politics for Sterling in June.

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