You are here

BREXIT

Brexit quandary to make for volatile pound: analysts

New British government looks set to push for renegotiation of deal with EU; if UK leaves without a proper deal, sterling may drop back to late-2016 low of 1.675 against the SGD

BPpound_260719_2.jpg
The British pound's performance may be as hard to predict as the country's new Prime Minister, with analysts putting wide-ranging bets on the currency in the wake of Boris Johnson's entry to 10 Downing Street.

Singapore

THE British pound's performance may be as hard to predict as the country's new Prime Minister, with analysts putting wide-ranging bets on the currency in the wake of Boris Johnson's entry to 10 Downing Street.

With Mr Johnson promising to take the United Kingdom out of the European Union by Oct 31, deal or no deal, uncertainty over this process will be the main drag on the sterling's performance, said analysts.

"The new Boris Johnson government, packed with pro-Brexiteers, looks set to push for a re-negotiation of the deal, and possibly compel the EU to compromise," said OCBC Bank currency economist Terence Wu.

sentifi.com

Market voices on:

The tough negotiations ahead will mean a "constantly changing perception of the odds of a no-deal Brexit", and accompanying volatility for the sterling ahead of Oct 31, he added.

The pound is "currently struggling around the 1.70 psychological level" against the Singapore dollar, said FX analysts from UOB Global Economics and Markets Research.

In the next one to three weeks, they see immediate technical support and resistance levels of 1.6890 and 1.7120 respectively. If the UK leaves the EU without a proper deal, the heightened uncertainty brings a risk that the pound may drop back to the late-2016 low of 1.675 against the SGD, they added.

Against the SGD specifically, the picture is complicated by weak growth and expected exchange rate easing by the Monetary Authority of Singapore (MAS).

ING Asia economist Prakash Sakpal noted that the SGD's "steep appreciation streak" against the pound, since May, has now halted after dismal second quarter figures fuelled speculation about an off-cycle easing before October's policy meeting.

But he added: "With the MAS likely slowing the appreciation path for SGD-NEER (nominal effective exchange rate), as what many of us expect it to do instead of moving to an outright depreciation path, the SGD will have room to outperform GBP in the period ahead."

DBS currency strategist Philip Wee sees possible support levels for the pound against the SGD going as low as 1.60 by end-2019 and 1.58 by end-2020.

This is already given the assumption that the MAS eases policy in October, with the SGD NEER moving to the lower half of the policy band.

In contrast, Maybank head of FX research Saktiandi Supaat notes that their forecast for the pound's upward trajectory is "kept unchanged for now", premised on the base case of a smooth Brexit.

Their house view is for the pound to rise from 1.727 against the SGD at the end of Q3 2019, to 1.754 by the end of Q2 2020.

Despite Brexit negativities, the pound could see some upsides against the SGD "as much of the Brexit-negativities has been priced in, while markets are only gradually pricing in expectations of MAS easing in Oct," he said.

Maybank sees a chance of MAS moving to a neutral slope, which might result in the full downward impact on SGD NEER of "a bit more than 1 per cent".

But Mr Saktiandi noted that the pound could more than undershoot their forecast if an election is held before Oct 31 or a no-deal Brexit comes to pass, and could conversely more than overshoot their forecast if the eventual negotiated Brexit terms are seen to be market-friendly.

Though acknowledging that risks of the former have risen and risks of the latter have declined, Maybank is waiting for more information as Mr Johnson's cabinet choices and re-negotiation attempts with EU officials begin, he concluded.