By Jonathan Cable
LONDON (Reuters) – Sterling is likely to drop around 5 percent against the dollar soon after Britain starts its formal divorce proceedings from the European Union next year, but it is not expected to weaken to parity with the euro, a Reuters poll found.
Since Britons voted on June 23 to leave the EU, the pound has dropped almost 20 percent against the dollar, a decline that is not yet over, according to the poll of over 60 foreign exchange strategists taken in the past few days.
Prime Minister Theresa May has said she intends to trigger Article 50, which starts the two-year countdown to leaving the EU, before the end of March, and the median forecast suggested after she does the pound would fall to $1.15.
Many people think May is leaning towards a “hard Brexit” – imposing controls on immigration but giving up access to the EU single market – which would hinder trade and further hurt sterling.
But details about what form the talks will take have been scant, and data since the referendum have generally been better than expected, so the outlook is far from clear.
“Next year, we see the economy holding up somewhat better than some commentators still fear, whilst hopefully we should get a little more clarity on Brexit arrangements,” said Chris Hare at Investec, who sees little downwards movement.
Still, forecasts were generally lowered in the latest monthly poll from an October survey after the pound had a torrid few weeks, falling to a 31-year low, which while a boon for exporters means inflation is likely to rise rapidly.
With inflation expected to rise above the Bank of England’s target next year, the central bank is not expected to ease policy on Thursday.
Bank Rate is already at a record low of 0.25 percent. That poll published last week predicted another 15 basis points would be taken off early next year.
In contrast, the United States Federal Reserve is widely expected to raise interest rates next month, around a year after it last tightened policy.
That would lend additional support to the dollar. The pound is currently trading around $1.216, and medians from the wider poll put the pound at $1.21 in six months and at $1.23 a year from now. In last month’s poll the six- and 12-month forecasts were for $1.27.
A few forecasters said the pound may reach or fall below parity with the dollar, the first time anyone has made that forecast in over 20 years of Reuters polls on the currency.
Meanwhile, a stable but lackluster economic outlook is expected to push the European Central Bank to tweak its asset purchase program and announce an extension by year-end.
The pound has also struggled against the euro but only around a sixth of the analysts who answered an extra question said the pound would reach parity with the common currency.
“We don’t think EUR/GBP will fall below parity as the euro is under depreciation pressure as much as sterling,” said Colin Asher at Mizuho Securities.
One euro is currently worth about 89.9 pence and in six months it will be 89.7p. In a year a euro will get you 88.7p.
(Polling by Vartika Sahu and Purnita Deb, editing by Larry King)