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Pound sterling will not hit euro parity this year but Brexit will bring more pain, says HSBC

Josie Cox
'Bloodied but unbowed, we turn to 2018 and look for [sterling] weakness,' the strategists write: Getty

Forecasters at HSBC have admitted to being “wrong” and have scrapped their prediction that the pound will hit parity against the euro later this year.

In a note on Monday, strategists David Bloom in London and Daragh Maher in the US, said that the Bank of England’s “unexpected hunger to join other G10 central banks in the race to the exit from accommodative monetary policy has given additional impetus to [the pound]”.

Against their expectations, they said that sterling had “happily ignored the political intrigue of Brexit throughout 2017”.

On Thursday last week, the pound surged after minutes from the Bank of England indicated that policy makers were gearing up to raise interest rates for the first time in over a decade. Its rally was supercharged on Friday, when monetary policy committee member Gertjan Vlieghe – who as recently as July told The Independent that a rate rise would be “premature” and a “mistake” –suggested that he would soon be in favour of increasing them.

In Monday’s note, Mr Bloom and Mr Maher said that they were “admitting defeat” for 2017 and revising their year-end targets.

They now see the pound at to $1.35 against the dollar— from just above that level on Monday. And they see one euro buying £0.89 at the end of the year. Previously they had expected sterling to be at $1.20 against the buck and one euro to be equivalent to one pound in the final quarter of 2017.

Looking ahead to 2018, however, they’re still bearish on the UK currency.

“Bloodied but unbowed, we turn to 2018 and look for [sterling] weakness,” they wrote.

“The ticking clock on Brexit negotiations is likely to lend politics greater influence, especially if progress remains difficult to come by,” they added.

They said that the pound’s tight relationship with the interest rate outlook in recent months suggests that “very little is in the price for political risk” and that this “complacency […] opens up asymmetric downside risks”.

“The idea of heightened political uncertainty, difficult Brexit negotiations, or persistent trade deficits – is now playing second fiddle to the possibility of a cyclical rate rise,” they write. “Nevertheless over time, politics will become front and centre again – but as it would seem not in 2017.”

They see the euro rising to £0.95 at the end of next year and the pound falling to $1.26 against the dollar.

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