Sustained recovery in sterling unlikely until next year

Sterling recovered some lost ground in September. But we still think that it will drop back over the rest of 2018. Indeed, it seems highly unlikely that a Brexit deal will be agreed (and ratified by the UK Parliament) in the coming months. And investors are only pricing in a slim chance of a “no deal” Brexit. As a result, we continue to expect sterling to pull back to $1.25 and €1.09 by end-2018. However, provided a Brexit deal is eventually agreed, then there seems to be plenty of scope for sterling to rebound. What’s more, our forecast is that in this scenario interest rates would rise more quickly than the markets expect. This should put further upward pressure on the pound. We anticipate a rebound to $1.45 and €1.21 by the end of 2019.