Monday 29 May 2017

In or out of Europe, sterling will remain weak, analysts warn Irish exporters

Supporters of the UK remaining in the EU canvassing in England
Supporters of the UK remaining in the EU canvassing in England
Donal O'Donovan

Donal O'Donovan

Exporters are being warned not to bet on a recovery in sterling if Britain votes to stay in the European Union.

Strategists and investors are pointing to other reasons for the UK currency to stay weak, from a gaping current-account deficit to speculation interest rates will stay low for the foreseeable future after the economy slowed dramatically in the first three months of this year. The pound has already fallen sharply against a raft of currencies.

Last November a euro bought just 70 pence sterling, but that had risen to 81 pence by last week, amid doubts about Britain's membership of the world's largest single market.

Pioneer Investments, which predicted sterling's slide in the second half of 2015, and Julius Baer, the second most-accurate currency forecaster, see a bounce of no more than 4pc after a "remain" vote on June 23, and for any gains to quickly evaporate.

"If the referendum says we stay in the EU, then we think the reward for the pound, or the support for the pound, will be very muted," said David Kohl, the head of foreign-exchange research at Julius Baer in Frankfurt.

"A week after the referendum, it will be quickly forgotten as you maintain the status quo. The downside is very high."

A decision to leave the EU would lead to "a short-term disaster and long-term damage" for the pound, said Manuel Andersch, a Munich-based strategist at Bayerische Landesbank. "On a 'Brexit' announcement, a 20pc move by the pound is very achievable," said Paul Lambert of Insight Investment Management, a Bank of New York Mellon unit that manages about $540bn. "If we vote to stay in, then it'll be a function of the extent to which the Bank of England" starts to sound more hawkish about rate rises, he said.

A vote to remain in the EU would bring forward expectations of a currency-boosting rate rise, but only to the first quarter of 2018, Bloomberg Intelligence economists estimate.

The UK economy, and its currency, face other challenges. Britain's current-account deficit widened to a record 7pc of gross domestic product in the fourth quarter, the most ever, which may dent sterling's traditional appeal as a haven.

The IMF cut its UK growth forecast this week, warning of "severe" damage if the nation quits the EU. (Additional reporting Bloomberg)

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