Are we there yet? Some are starting to wonder, with Bank of America Merrill Lynch saying it’s “looking to buy the dip” in the pummeled pound.
That’s… quite a dip. Remember when sterling hit $1.50 on referendum night? Still, Kamal Sharma, an analyst at the bank, thinks the time may soon (not yet) be right to get back in, particularly as the usual measures of growth, housing and labour markets would usually point to a stronger exchange rate. “We are more optimistic on the medium-term outlook,” he says, eyeing a rise to the initial post-referendum trading range, which spanned around $1.28 to $1.35. (It’s now at $1.26.)
We expect one final dip in sterling as Article 50 is formally triggered and as the EU formally responds and sets out its negotiating position. We think the crystallization of risks and the start of the countdown to Brexit may prove to be the low in sterling and the opportunity to enter longs.
The formal triggering of Article 50 will mark the final phase of sterling’s decline and mark the low point for sterling this year. Our Q1/Q2 forecast remains $1.15, although we concede that this target is being challenged. The scale of the sterling reaction will hinge on the EU’s initial response to formal triggering. We are not optimistic on this front. We expect that the EU will inject a dose of reality regarding the challenges the UK will face in forthcoming negotiations. The EU will likely reiterate its red lines (the four fundamental freedoms) and the 2-year stopwatch thus becomes live. This scenario effectively challenges the growing view that the process toward divorce will not be a smooth one.