Helaba Research
FX FOCUS
18 October 2016
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 US dollar was able to gain against the euro. A few emerging country and commodity
currencies appreciated even more strongly. The biggest loser by far was the British pound.
Concerns over the Brexit have most recently put the pound under considerable pressure, as
anxieties about a non-amicable solution have grown. However, the negotiation process is
only just beginning, which means that every statement must be taken with a grain of salt.
The economic fallout of the Brexit vote has been surprisingly limited – so far. By now, the
pound is very favourable valued. That is why the pound, in spite of all the uncertainties,
should stabilize at the current level, especially against the euro.
Helaba Currency Forecasts
Performance on a month-over-month basis
% vs. euro compared to the previous month (from 09/16 to 10/17/16)
US dollar
1,4
Japanese yen
-0,1
British pound
-5,0
Swiss franc
0,5
Canadian dollar
2,1
Australian dollar
3,3
New Zealand dollar
-0,5
Swedish krona
-1,4
Norwegian krone
3,0
Czech koruna
0,0
Polish zloty
-0,3
Hungarian forint
0,4
5,0
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
up-to-date.
All
statements in this publication
are
for
informational
purposes. They must not be
taken as an offer or
recommendation
for
investment decisions.
Russian ruble
Turkish new lira
-2,3
South Korean won
0,9
Chinese yuan
0,5
Indian rupee
2,2
South African rand
1,6
3,3
Brazilian real
5,3 Mexican peso
■ Core currencies ■ Rest of G10 ■ Currencies of emerging markets
Sources: Bloomberg, Helaba Research
HELABA RESEARCH · 18 OCTOBER 2016 · © HELABA
1
FX FOCUS BRITISH POUND
GBP: Quiet after the storm
The Brexit is getting serious! Some may have believed that the outcome of the British EU
referendum in June might be ignored, or that at least there would be a quick and amicable solution.
At the party congress of the Conservatives, Prime Minister May announced that the government
would submit the application to leave by March 2017, sending the pound into a downward slide. At
the same time, she showed herself not very ready to compromise, and similarly implacable tones
followed from EU representatives. Fear of a “hard” Brexit is in the air, which would no doubt entail
considerable negative economic consequences for the UK. The euro-pound exchange rate climbed
to over 0.90, a 4 % gain since the party congress. And Britain’s currency lost even more ground
against the US dollar – leaving aside still the “flash crash” of October 7, when the pound plunged
by 6 % within two minutes.
Is a further plunge of the British pound now inevitable? The first wave of depreciation following the
Brexit vote is still comparatively comprehensible based on interest rate differences and economic
data. The economic sentiment indicators took a clearly negative turn. The Bank of England
reacted: in addition to a cut in the key rate, the central bank launched a bond-buying program, and
the yield differences moved to the disadvantage of the British currency.
A surprisingly solid
fundamental environment
By contrast, the new wave of depreciation involving the pound can hardly be substantiated with
fundamental factors. The economic slump – something we also expected – has so far not
materialized, not to mention a global Brexit recession. For the third quarter, the signs point for the
British economy to a somewhat slower but still solid growth, something that is putting our forecast
under scrutiny, at least as far as 2016 is concerned. A few sentiment indicators have recovered
noticeably, which means that from the economic side there is no major threat in the near future.
The result of this could be that the Bank of England will postpone the further rate cut it has hinted
at into the coming year. And the yield differences vis-à-vis the euro have also improved form the
perspective of the pound, even if a marginally higher risk premium on British bonds is slightly
distorting the value. The most recent pound weakness is thus above all one thing: fear-driven.
Yield spreads tended to support the pound recently
British economy remarkably robust . . . so far
GBP
% yoy
% pound
Sources: Macrobond, Helaba Research
Party congress tactics
or conviction?
Index
Sources: Macrobond, Helaba Research
Statements made on party congresses should in principle be taken with a certain grain of salt –
and that applies, incidentally, also to statements by the head of Scotland’s government, Sturgeon,
regarding Scottish independence. That Prime Minister May chose a rather tough tone at the
congress of a party, the majority of whose voters were in favour of the Brexit, is hardly surprising.
What is remarkable is that liberal economic voices are increasingly being pushed into the
background in the Thatcher party. The role of the state is getting more weight, and foreign workers
are cast in a critical light. Brexit proponents who are in favour of a “radical free-market” policy
beyond the EU are hardly pleased. The fundamental trend of British economic policy under May
thus raises questions, not only with respect to the Brexit.
HELABA RESEARCH · 18 OCTOBER 2016 · © HELABA
2
FX FOCUS BRITISH POUND
Back and forth in Brexit
negotiations at least
until 2018
Some politicians from the EU or its member states have also embraced a rather tough bargaining
position. For tactical reasons, alone, the EU should deter other potential candidates interested in
leaving with a line that shows little willingness to compromise. As it is, intensive negotiations are on
the agenda in the EU – let us recall only certain bailouts in the wake of the debt crisis. On the other
hand, some national governments will act toward the British in a rather accommodating way,
simply for reasons of self-interest. If the British activate the exit paragraph 50 of the EU treaties in
March of 2017 and the Brexit takes effect after two years of negotiations, a consensual
compromise will hardly emerge before the middle of 2018. Until then, the British pound will
presumably be pulled back and forth between the hope of an amicable solution and concern over
the failure of the negotiations.
A political calming down is not unlikely in the near future, especially since the British pound is
clearly oversold from a technical point of view. Moreover, large speculative positions against the
pound exist at the futures exchanges – often a contra indicator. Above all, however, the pound
sterling is very favourable valued at the current level, as real exchange rate indexes indicate. In
view of the significant current account deficit as well the political risks, a certain undervaluation is
surely called for. Overall, however, the further depreciation potential is thus certainly limited.
Pound sterling strongly undervalued
Pound-dollar rate burdened by monetary policy
Index
USD
Sources: Macrobond, Helaba/Research
Sources: Macrobond, Helaba Research
% points
Still, the pound is still far from being truly attractive. Britain’s economy is likely to weaken still
noticeably. Uncertainty should grow with the increasing discussion about the consequences of the
Brexit, which means that there is a tendency for major investments to be postponed. Declining
prices for commercial real estate could already be an indication in this direction. Higher import
prices resulting from the depreciation of the pound will likely damp consumption, which will not be
necessarily compensated for by higher exports. The Bank of England will presumably pay attention
to the growth data and ignore the temporary rise in inflation. A further interest rate cut in the
coming year should come as no surprise. However, to a considerable degree the exchange rates
seem to have already anticipated the worsening in the interest rate differential from the perspective
of the pound that would go along with this.
Stabilization in the
pound sterling
The political uncertainties regarding the Brexit will presumably continue largely during the two-year
negotiation phase, until the compromise we expect will be arrived at. With the political ups and
downs, the euro-pound rate should hover around 0.90 for the time being. Entirely possible
temporary rises above this level should trigger swift countermovements. The parity in the europound exchange rate that was briefly recorded during the global financial crisis in 2008/09 should
not be a yardstick, since the euro zone is currently in a very different situation. When it comes to
the US dollar, the pound still has some room on the downside because of the Fed’s interest rate
hikes. However, the pound-dollar exchange rates should also settle down just below 1.20.
HELABA RESEARCH · 18 OCTOBER 2016 · © HELABA
3
FX FOCUS BRITISH POUND
Helaba Currency Forecasts
Performance
year to date 1 month
vs. Euro
US dollar
current*
Q4/2016
Forecast horizon at end ...
Q1/2017
Q2/2017
Q3/2017
(vs. Euro, %)
-1,3
1,4
1,10
1,05
1,05
1,05
1,05
Japanese yen
14,3
-0,1
114
110
115
115
115
British pound
-18,4
-5,0
0,90
0,90
0,90
0,90
0,85
Swiss franc
0,0
0,5
1,09
1,08
1,10
1,10
1,10
Canadian dollar
4,1
2,1
1,44
1,39
1,39
1,40
1,39
Australian dollar
3,4
3,3
1,44
1,50
1,50
1,54
1,50
Swedish krona
-5,4
-1,4
9,69
9,50
9,20
9,00
8,90
Norwegian krone
6,8
3,0
9,00
9,00
8,90
8,90
8,70
Chinese yuan
-4,3
0,5
7,41
7,14
7,19
7,14
7,14
15,7
-1,5
104
105
110
110
110
Swiss franc
1,3
-0,9
0,99
1,03
1,05
1,05
1,05
Canadian dollar
5,4
0,6
1,31
1,32
1,32
1,33
1,32
Swedish krona
-4,2
-2,8
8,81
9,05
8,76
8,57
8,48
vs. US-Dollar
Japanese yen
(vs. USD, %)
Norwegian krone
8,1
1,6
8,18
8,57
8,48
8,48
8,29
Chinese yuan
-3,6
-0,9
6,74 1,57
6,80
6,85
6,80
6,80
-17,3
-6,3
1,22
1,17
1,17
1,17
1,24
4,7
1,8
0,76
0,70
0,70
0,68
0,70
US-Dollar vs. …
British pound
Australian dollar
(vs. USD, %)
*17.10.2016
Sources: Bloomberg, Helaba Research 
HELABA RESEARCH · 18 OCTOBER 2016 · © HELABA
4
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