Sterling to slip again once EU divorce talks start - Reuters poll

LONDON (Reuters) - Sterling’s relative upswing over the past few weeks will come to an end when Britain formally begins divorce negotiations with the European Union, and if the talks turn fractious its fall could be steep, a Reuters poll showed on Tuesday

A British ten pound note is seen in front of a stock graph in this November 7, 2016 picture illustration. REUTERS/Dado Ruvic/Illustration/File Photo

Since the surprise outcome in a June referendum, when Britons decided to quit the EU, the pound has slumped over 15 percent against the dollar and was trading at $1.237 on Tuesday. The economy, however, has fared much better than had been projected.

The poll suggested the pound will also suffer against the euro, despite the currency bloc’s own potential headwinds.

In one month’s time a pound will be worth $1.23, in three months $1.21 and in a year $1.21, according to the poll of over 60 foreign exchange strategists taken in the past week.

Those medians are a little stronger than in last month’s poll, with the pound up about 1.5 percent this year, but some still thought the pound could fall below $1.10 in a year.

Only around a third predicted a rise to $1.27 or above and none thought it would get anywhere near the $1.48 it was hovering around before the referendum.

Prime Minister Theresa May plans to trigger Article 50 - which starts the two-year countdown to Brexit - by the end of March. Many expect negotiations with the EU to be difficult.

So two thirds of the strategists who answered an extra question said their sterling forecasts over the next three months were more likely to be too high than low.

“If Brexit talks go haywire and/or, the economy begins to slow significantly, a material fall in the pound could result,” said Chris Hare at Investec.

Hare was the most optimistic forecaster on sterling in the poll, saying it will reach $1.35 in a year.

“We are fairly bullish on sterling, based on the view that we will see some correction from its significant undervaluation, while we also expect some support from some additional clarity on Brexit,” he said.

Sterling’s fall has been a boon to exporters and Britain’s economy unexpectedly outpaced all its major peers last year, wrongfooting those who expected an immediate hit from June’s Brexit vote, and the Bank of England sharply revised up its growth forecast for 2017 last week.

A Reuters poll last month predicted growth would slow after May pulls the trigger on Article 50. The Reuters foreign exchange poll taken ahead of the vote correctly predicted the rate of the pound’s slump in the aftermath of an out vote. [ECILT/GB]

The pound has also struggled against the euro but the currency union faces its own headwinds this year, with national elections looming in Germany, France, Italy and the Netherlands which could result in anti-euro political parties gaining significant ground or even taking office.

In one and three months a euro will be worth 86.0 pence, and in a year it will get you 86.9p. It was trading around 86.2p on Tuesday. Two strategists expect the currencies to reach parity with each other over the coming year.

Polling by Anu Bararia, Vartika Sahu and Khushboo Mittal; Editing by Ross Finley