According to Paul Dales, an analyst at research firm Capital Economics, the pound could rebound this year to levels seen before Brexit referendum. Dales believes that an improvement in risk sentiment across the globe and a comparative increase in the UK interest rate forecasts could strengthen the pound.
The forecast has come at a time when the pound continues to rally against its major rivals such as the euro, the US dollar and the yen. The only currency, which is outclassing the pound, is Norway’s krone, a commodity currency strengthening on rising crude prices.
According to the independent research firm, the main reason for the pound’s uptrend has been the fast decline in the Covid-19 cases and the vaccination drive that is expected to pave way for unhindered reopening of the economy much before several countries which lag behind in the vaccine roll out.
More importantly, the next phase of reopening will not be temporary. Dales believe that vaccine roll out will lead to diminishing prohibitions beyond June resulting in quicker and complete rebound in economic activity than many people anticipate.
The UK Prime Minister Boris Johnson is anticipated to unleash an unlocking program on February 22. Schools are expected to reopen on March 08. The UK economy is much dependent on hospitality business. Capital Economics anticipate the hospitality sector to reopen in April, as per leaked details. On the contrary, the research firm forecasts slow recovery in the Eurozone due to delays in the vaccine rollout.
Capital Economics have also pointed out that along with the pound many UK assets will record an increase in value from the current discounted levels on successful roll out of Covid-19 vaccine.
Dales opined that several sectors in the UK, including energy, financial and other consumer facing business, currently command an attractive valuation. The vaccine roll out, followed by economic rebound will boost the stocks pertaining to these sectors at a quicker rate than anywhere else.
Academics state that a robust economic rebound in the second-half of 2021 will assist the stocks listed in the UK financial market to eclipse returns offered by the US equities, a welcome change after several years of underperformance by the UK equities.
The outperformance will also be fueled by rising crude prices, which form a major component of FTSE 100. The research firm predicts crude to trade at $70 per barrel by the end of this year.
The forecast has come at a time when the FTSE 100 has begun to record gains this month, eclipsing its US and European counterparts.
Chris Beauchamp, Chief Market Analyst at IG, has opined that investors who have been seeing the FTSE 100 index lag considerably behind the comparable European and US indices will certainly feel happy in the months ahead.
Beauchamp believes that commodity and crude in particular will lead the rise. He expects the crude price to rally further as there are no indications of a slowdown. The analyst also cites the sharp rise in the price of mining stocks that were beneficiaries of sharp price rise of raw materials. The UK assets will also get a boost from the fading leftover from the EU referendum five years back as post-Brexit trade discussions have ended.
For years, investors and companies were worried about the nature of trade deal between the UK and the EU. With the post-Brexit trade deal removing the uncertainty, the pound and other UK assets are expected to record further appreciation in value.
According to Dales, in the years ahead, the UK assets are expected to outperform assets of other countries as they have been underperforming since the 2016 Brexit referendum.
The overall improvement in global risk sentiment and expectations of rate hike in the UK will strengthen the pound, in comparison to its peers.
Currently, Capital Economics anticipate the GBP/USD rate to rise from the prevailing levels of about 1.39 to 1.45 this year. If that happens, the GBP/USD exchange rate would be only slightly lower than the level seen before the 2016 referendum. Dales, however, expect the upside against the Eurodollar to be restricted. The analyst expects the GBP/EUR rate to rise from 1.15 to 1.16 levels.
