For Guy Foster, head of research at Brewin Dolphin, the fall – and potential recovery – of the pound represents a major investment theme for 2017.
“Currencies are generally considered to be quite difficult to predict, but there are a range of indicators which inform their fundamental valuation and their likely next move,” says Foster, who’s analysis suggests the pound is still only modestly undervalued.
“The path of the pound in 2017 will be heavily influenced by the relative movement of interest rates. The general trend of central banks is towards the tentative removal of stimulus but in the UK the Bank of England will have a higher hurdle than most before it is prepared to take away the punch bowl.
“This is because the UK ends 2016 with reduced job creation and the Bank is worried about how the economy will perform once the government triggers Article 50 to start negotiations to leave the EU.”
Political risk will again play its part and for Paresh Davdra, CEO and co-founder of RationalFX, the big difficulty in predicting how well the currencies and the exchange rate will perform lies in the fact that a fall in the pound and ‘hard’ Brexit benefits the euro, while political instability in the EU boosts the pound.
“With the outlook constantly shifting, analysts will be looking for any clues that indicate which way the pound and euro will go,” he said.
“The pound is expected to be greatly affected by the triggering of Article 50, but the prospect of a transitional period suggests more stability for the currency. The euro is at risk from the political instability within the EU, most notably the uncertainty surrounding the French elections.”
