Helaba Research
FX FOCUS
24 April 2017
British pound
AUTHOR
Christian Apelt, CFA
phone: +49 69/91 32-47 26
[email protected]


EDITOR:
Claudia Windt
PUBLISHER:
Dr. Gertrud R. Traud
Chief Economist/
Head of Research
Helaba
Landesbank
Hessen-Thüringen
MAIN TOWER
Neue Mainzer Str. 52-58
60311 Frankfurt am Main
phone: +49 69/91 32-20 24
fax: +49 69/91 32-22 44

The British pound and the Japanese yen appreciated noticeably against the US dollar and
the euro in recent weeks. In emerging markets, the South African rand lost markedly.
The British pound advanced following the announcement of new elections by Prime Minister
May. As it was, the Brexit-plagued currency has been holding up quite well over the last few
months. However, the negotiations with the EU will remain difficult even with a larger parliamentary majority of the Conservative Party. The uncertainties are likely to lead to temporary setbacks for the pound. The British currency will presumably remain stable against the
US dollar over the medium term, since the potential for disappointments persists also in the
US. The pound should weaken a little against the euro.
Helaba Currency Forecasts
Performance on a month-over-month basis
% vs. euro compared to the previous month (from 03/23 to 04/21/17)
US dollar
0,5
Japanese yen
2,3
2,8
Swiss franc
0,2
-0,6
Canadian dollar
-0,6
Australian dollar
New Zealand dollar
0,5
Swedish krona
-1,4
Norwegian krone
-1,6
Czech koruna
0,3
Polish zloty
0,0
This publication was very
carefully researched and
prepared.
However,
it
contains
analyses
and
forecasts regarding current
and future market conditions
that are for informational
purposes only. The data is
based on sources that we
consider reliable, though we
cannot assume any responsibility for the sources being
accurate, complete, and upto-date. All statements in
this publication are for
informational purposes. They
must not be taken as an offer
or
recommendation
for
investment decisions.
British pound
Hungarian forint
-1,1
2,0
Russian ruble
Turkish new lira
0,4
South Korean won
-0,4
Chinese yuan
0,8
2,2
Indian rupee
South African rand
-4,6
Brazilian real
0,4
1,2
Mexican peso
■ Core currencies ■ Rest of G10 ■ Currencies of emerging markets
Sources: Bloomberg, Helaba Research
HELABA RESEARCH · 24 APRIL 2017· © HELABA
1
FX FOCUS BRITISH POUND
GBP: more risks than opportunities
Not long after the UK submitted its formal application to leave the EU, Prime Minister May made a
surprise move: Parliament will be dissolved and new elections will take place on June 8th. In the
face of a Labour opposition in disarray, May is hoping for a clearer majority, not least in order to
usher the legal changes connected to the Brexit through Parliament more easily. In response, the
British pound leapt for joy: the euro-pound exchange rate briefly dropped to 0.83. Against the US
dollar, the British currency rose to 1.29. Will new elections really make Brexit easier and bolster the
pound?
Hopes for an exit from Brexit are not supported by new elections. Only the Liberal Democrats and
the Scottish Nationalist have come out against leaving the EU, while Labour has not. A government other than one led by the Conservatives is highly unlikely. Their lead in the polls of around
20 % over Labour cannot be directly converted into seats given the first-past-the-post system.
There are estimates that the conservative majority could swell from currently 16 to more than 100
seats. May will presumably remain in office. However, these considerations must be treated cautiously, since the government’s cushion will presumably not be anything on that scale.
Victory by the Conservatives likely
Conservative Party clearly in the lead
Is growth finally slowing down?
Election polls, in % of votes
% yoy
50
Conservatives
45
45
40
40
35
35
30
30
25
20
15
Index
50
25
Labour
Lib Dem
UKIP
10
5
0
Mai 15
20
15
10
5
SNP
0
Nov 15
Mai 16
Sources: Wikipedia, Helaba Research
Agreement likely, but
by no means certain
Nov 16
Sources: Macrobond, Helaba Research
It is highly doubtful whether a somewhat larger majority will significantly simplify the work of the
government. For example, it is possible that the number of advocates of a “hard” Brexit could increase noticeably within the new conservative faction, which would hardly promote the willingness
to seek compromise. As it is, from the British perspective the EU constitutes the bigger obstacle.
So far, the representatives of the European Union have sounded rather unanimous. The British
government should run into trouble negotiating a good “deal”, especially since the British are more
dependent on the EU than the other way around. In addition to a substantial exit bill, an agreement
could encompass broadly free trade in goods, restrictions on services, especially in the financial
sector, reduced payments to the EU, and a restricted, though to some extent still existent, free
movement of workers. The fact that the dissolution of Parliament means that the subsequent, regular election in the UK are no longer scheduled for 2020, shortly after the end of the Brexit negotiations, but not until 2022 is no doubt very much in line with the government’s intent. Independent of
that, the ratification of the agreement entails risks that should not be underestimated.
The currency market is hoping for a rather amicable outcome to the Brexit negotiations. But even
if, as we expect, a compromise will emerge in the end, the two-year negotiation phase will be complicated. Experience teaches us that agreements in EU talks are achieved only when they are
about to fail. One should therefore expect a roller coaster ride for the negotiations. For that reason
alone, the British currency will come under pressure at various times. The pound sterling, following
the collapse after the referendum in June and Prime Minister’s May speech at the convention of
the Conservative Party in October, has proved stable – more precisely, it has even recovered. One
reason for this is the remarkably robust economy in the UK to date. Thus, growth in the second half
HELABA RESEARCH · 24 APRIL 2017 · © HELABA
2
FX FOCUS BRITISH POUND
of 2016 surprised observers by accelerating slightly. That is also why the Bank of England (BoE)
refrained from further interest rate cuts, and even oriented itself carefully in the direction of a more
restrictive monetary policy.
Slowdown in growth
However, Britain’s growth is now losing steam. It is likely that the GDP grew more slowly in the first
quarter. The rise in housing prices slowed down. In the first quarter, retail actually suffered the
strongest decline in sales since 2010. The inflation triggered by the depreciation of the pound and
the rise in oil prices reduced the real purchasing power of consumers, which is why private consumption will also grow more slowly in the coming quarters. The uncertainty that goes along with
the Brexit should prove a growing burden on business investments. The British economy is likely to
expand at a rate of just below 1.5 % in 2017, which is lower than the previous year (1.8 %).
US yield advantage over pound has shrunk
USD
Pound sterling favourably valued
% points
Sources: Macrobond, Helaba Research
Trade-weighted index
Sources: Macrobond, Helaba Research
Recently, the British central bank did place greater emphasis on the upside risk when it comes to
inflation. But even if inflation, most recently at 2.3 %, is likely to rise further, the long-term risks
remain limited, especially since the economy is losing some of its dynamism. As a result, Britain’s
central bank will retain a wait-and-see stance at least for the rest of the year. Positive impulses for
the pound are thus not forthcoming for the time being. Concerns about the economy and political
uncertainty, which will increase at least during certain periods, could in fact prove a noticeable
burden for the pound.
Stable against
the US dollar
In its slight recovery against the US dollar, the British pound was helped by waning US optimism.
After Donald Trump’s victory in the presidential elections, the sentiment indicators and stocks indexes in the US, Treasury yields, and the US dollar surged. By now, given the difficulties that the
President is encountering in realizing his plans, a certain disenchantment is setting in. Moreover,
the “hard” economic data disappointed most recently. The US central bank is maintaining its cautious course of interest rate hikes, its move in March notwithstanding. Thus, both the British and
the US economy are offering a certain potential for disappointment. Even if the pound sterling
could still come under pressure, the dollar-pound exchange rate should prove stable over the medium term and trade around the current level of 1.28.
Slight weakness
against the euro
The euro-pound rate dropped most recently below 0.84 and is thus approaching its post-Brexit low,
after still surging past 0.90 last October. While the economy in the euro zone proved robust, the
political uncertainties are weighing on the euro. After the elections in France, an easing set in, and
it favours the euro. If, over the course of the year, it becomes evident that the ECB is slowly bidding farewell to its extremely expansionary policy, the euro-pound exchange rate should rise at
times back up to 0.90. However, the British currency should not get much weaker than that. After
all, it is already favourable valued at the current level. As long as there is a chance of a compromise solution with the EU, the downside risks remain contained. Overall, the euro-pound exchange
rate will hover in the range of 0.85 to 0.90 in the coming months.
HELABA RESEARCH · 24 APRIL 2017 · © HELABA
3
FX FOCUS BRITISH POUND
Helaba Currency Forecasts
Performance
year to date 1 month
vs. Euro
current*
Q2/2017
Forecast horizon at end ...
Q3/2017
Q4/2017
Q1/2018
(vs. Euro, %)
US dollar
-2,0
0,5
Japanese yen
5,2
2,3
117
121
121
115
120
British pound
1,9
2,8
0,84
0,90
0,90
0,85
0,85
Swiss franc
0,3
0,2
1,07
1,08
1,10
1,10
1,10
Canadian dollar
-2,4
-0,6
1,45
1,44
1,52
1,49
1,49
Australian dollar
2,6
-0,6
1,42
1,43
1,47
1,45
1,47
Swedish krona
-0,8
-1,4
9,66
9,30
9,10
9,00
9,00
Norwegian krone
-2,3
-1,6
9,30
8,90
8,80
8,70
8,70
Chinese yuan
-0,4
0,8
7,37
7,59
7,99
7,70
7,70
7,2
1,7
109
110
105
105
109
Swiss franc
2,3
-0,3
1,00
0,98
0,96
1,00
1,00
Canadian dollar
-0,4
-1,1
1,35
1,31
1,32
1,35
1,35
Swedish krona
1,2
-1,8
9,00
8,45
7,91
8,18
8,18
Norwegian krone
-0,3
-2,1
8,67
8,09
7,65
7,91
7,91
Chinese yuan
0,9
0,0
6,89 1,57
6,90
6,95
7,00
7,00
vs. US-Dollar
Japanese yen
US-Dollar vs. …
1,07
1,10
1,15
1,10
1,10
(vs. USD, %)
(vs. USD, %)
British pound
3,9
2,4
1,28
1,22
1,28
1,29
1,29
Australian dollar
4,6
-1,1
0,75
0,77
0,78
0,76
0,75
*21.04.2017
Sources: Bloomberg, Helaba Research 
HELABA RESEARCH · 24 APRIL 2017 · © HELABA
4
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RWE AG
SAP SE
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