One of the pound’s most accurate forecasters is also one of the most bullish on the currency, predicting a rebound on expectations that Britain will miss the latest deadline for leaving the European Union.
The pound will climb about 6% to $1.33 by the end of the year according to Svenska Handelsbanken AB, which was among the most accurate forecasters on the pound for the past three quarters. Kiran Sakaria, a 28-year-old strategist at the Swedish firm, said its assessments are strengthened by its distance from the daily churn of Britain’s political drama, and a focus on economic fundamentals instead.
"We don’t sit in London like many of our competitors and perhaps this is a key factor," he said in an interview. "Even though we follow the British newspapers, Brexit is not as apparent in Sweden."
Handelsbanken successfully predicted that Brexit would be delayed beyond its original March 29 deadline, which triggered a fall in the pound the following month on the heightened chances of a no-deal Brexit. This time around, Sakaria detects a different dynamic, with most of the bad news already priced in for sterling and the dollar outlook beginning to turn.
"Our main scenario is that the exit date will be postponed again," said Sakaria, who compiles the forecast as part of a team of strategists and economists in Stockholm. "But we don’t expect the uncertainty to grow much further. We don’t see the UK economy slowing very much from these levels."
His view compares to a median forecast for the pound of $1.28 at year-end. The prediction defies the gloom from some investors who predict a fall in sterling if Boris Johnson becomes prime minister in the coming weeks, potentially raising the threat of a no-deal departure. Sakaria thinks the currency has in fact already bottomed out.
"We expect cable to start trending higher now," he said, predicting sterling will rise to $1.31 by the end of August.
"The US economy will start slowing down, at the same time we will see rate cuts from the Fed."
While the Bank of England has held out the prospect of rate hikes if Brexit goes smoothly, money markets are betting it will have to change tack to cut borrowing costs amid a global downturn. BOE Governor Mark Carney said this week trade tensions have increased the risks to domestic growth.
Handelsbanken expects the central bank to keep rates on hold, and that the Brexit delay will ultimately lead to a general election or a second referendum. Even in that scenario, Sakaria is betting the pound will continue to outperform the dollar into 2020.
The pound has been tough to predict throughout the Brexit process with sudden political developments leading to big moves and bigger reversals. Sakaria said the key to Handelsbanken’s success has been focusing on short-term factors including the country’s business cycle, including interest rate differentials and risk appetite.
These had been coming up sterling negative throughout the first half of the year. But now the same signals are flashing more bearish for the dollar, with the possibility of a July Federal Reserve interest rate cut and a US slowdown, he said.