Private Idea: GBP medium to long-term Outlook

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"We doubt that GBP will profit much from early rate hikes as it will not be a function of strength in the economy, but early signs of speed limits in the economy post the pandemic/Brexit," says Eklöf.

Swedbank's medium-term expectations for the Euro vs. Pound are that it will ultimately remain confined to a range against the Euro but will trend weaker vs. Dollar and Canadian Dollar.While the outlook for the UK economy and Sterling is constrained, so too is that for the Eurozone and Euro.

Swedbank say they expect "the EUR to remain an underperformer in G10".

Key headwinds to the single-currency include:

- supply disruptions in the manufacturing sector
- weaker export demand from China
- the rise in energy prices
- rising Covid cases and the introduction of partial restrictions

As such Swedbank hold a Euro to Pound exchange rate forecast of 0.85 for the next twelve months, which translates into a Pound to Euro exchange rate of 1.1765.

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ملاحظة

While the outlook for the UK economy and Sterling is constrained, so too is that for the Eurozone and Euro.

Swedbank say they expect "the EUR to remain an underperformer in G10".

Key headwinds to the single-currency include:

- supply disruptions in the manufacturing sector
- weaker export demand from China
- the rise in energy prices
- rising Covid cases and the introduction of partial restrictions

As such Swedbank hold a Euro to Pound exchange rate forecast of 0.85 for the next twelve months, which translates into a Pound to Euro exchange rate of 1.1765.

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ملاحظة

Industrial production contracted 0.4% month-on-month in September, which is worse than the +0.2% the market was looking for while manufacturing grew 0.1% month-on-month in September, which is softer than the 0.2% the market was looking for.

The country's trade balance slipped deeper into deficit with -£14.74BN being reported, worse than the -£14.30 the market was expecting.

In short, it is hard to see a firm argument for Sterling upside amongst these disappointing data.

The Pound to Euro exchange rate is quoted at 1.1682 having started November at 1.1839, the Pound to Dollar exchange rate is at 1.3408 having started the month at 1.3681.

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ملاحظة

Looking ahead, Capital Economics says "the best of the recovery is now behind us," and that shortages combined with the hit to the real spending power of businesses and households from higher taxes and rising utility prices will mean that GDP growth is sluggish over the next six to nine months.

"We doubt that the Bank of England will raise interest rates above 0.50% next year," says Dales.

For the Pound this matters: raising interest rates is a potent source of support to a currency when those interest rate rises are a response to an economy that is enduring such strength that it risks overheating.

But the UK is not displaying any signs that such economic outperformance is on the horizon, meaning the Bank will feel it can sit on lower rates for longer.

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ملاحظة

HSBC's 2020 forecasts for the year ahead missed the spike in the value of the Pound against the Dollar in the earlier part of the year, but an end-2021 forecast of 1.34 looks to have been a pretty accurate call.

The Pound to Dollar exchange rate forecast for year-end 2021 is maintained at 1.34, for the end of the first quarter 2022 it is now at 1.33, 1.32 at the end of the second quarter, 1.31 at the end of the third quarter and 1.30 by year-end 2022.

HSBC's 2021 forecasts for the Pound against the Euro issued at the end of 2020 however proved to be wide off the mark, as they showed expectations for sustained weakness.

At the end of 2020 they forecast a Euro to Pound exchange rate of 0.94 by year-end 2021, spot is now at 0.8420 following a solid outperformance by the Pound.

EUR/GBP is now forecast at 0.86 by year-end 2021, a point forecast that persists through to the end of the second quarter and a point forecast of 0.85 is seen for the third and fourth quarters of 2022.

This gives a Pound to Euro exchange rate forecast of ~1.16 and ~1.18 for these respective points.