Investing.com – Though the shock decision by the U.K. to leave the European Union (EU), known as a Brexit, sent the pound tumbling to 31-year lows against the dollar, experts continue to predict a further leg-down for cable with some even warning that parity could be on the horizon.
The why behind “31-year lows” on a daily basis
Financial market headlines are ripe with references of GBP/USD hitting new 31-year lows on almost a daily basis.
To put that in perspective, it should be clear that each move beyond the prior low will be a fresh trough back to those self-same lowest levels since 1985.
This is simply because, at the height of the mid-80s sterling crisis, cable dropped in February 1985 to a low of $1.05.
Trading briefly above $1.30 on Thursday, the pound has a long drop to reach that point and only by taking out that level will cable have a new record low.
Further downside risks
Experts have been busy lowering forecasts after the Brexit victory in the June 23 referendum with many pointing to the political uncertainty surrounding the selection of a new Prime Minister expected to be decided on September 9 along with the posterior negotiations on a trade agreement and expected easing from the Bank of England (BoE).
Analysts at Hargreaves Lansdown crunched the numbers on interest-rate swaps in London markets and said the probability of rate cut at next Thursday’s BoE meeting was 78%.
Odds of a reduction by August were at 86% with a 27% chance that rates will be at 0% (from the current record low of 0.50%).
By the December meeting, the probability of a cut rose to 89% with a 34% chance of them being at 0% and an 8% of rates being negative.
“Initially August had looked more likely, but with economic data deteriorating and markets still nervous, it now looks probable the Monetary Policy Committee will adjudge that immediate action is warranted,” they said.
BNP Paribas also believes that the central bank meeting will be the next leg-down for sterling.
“In our view the market is still likely underpricing BoE easing, with our economists forecasting a 25 basis point (bp) rate cut next week followed by a 25bp cut at the August meeting and £100 billion worth of quantitative easing (including corporate bonds) to be announced by the November meeting,” they said.
“Lower rates and reduced (foreign direct investment) should leave the GBP vulnerable for some time to come,” they added.
Forecasts slashed
“The pound is now clearly seen as a high risk asset and when market sentiment becomes very risk averse, it will come under pressure,” experts from HiFX pointed out.
A large number of analysts have cut their forecasts for cable with varying degrees of bearish in their calls.
In a less bearish stance JP Morgan said cable would drop only to $1.29 in September before staging a recovery to end the year at $1.30 and continue the reversal up to $1.33 by June 2017.
In a middle-ground stance, Danske Bank predicts a drop to $1.22 in three to six months’ time with a recovery to $1.30 in a year.
Goldman Sachs forecast that the pound will hit $1.20 in the next 3 months as the BoE is forced to take action, with a recovery to $1.21 and $1.25 in the next 6 and 12 months, respectively.
Citigroup was looking for a drop to $1.20 as the BoE embarks on easing, while the bank’s head of European currency strategy told Bloomberg Television that “the question is ‘how quick do we get there?’”
HSBC set $1.20 as its target for the end of the year, in contrast to those analysts expecting a recovery after September.
UniCredit was among the most bearish with a projection that cable could fall to $1.20 or below due to potential easing by the BoE, an upcoming recession in the British economy and some reversal of foreign direct investment.
Deutsche Bank was perhaps the most bearish call, putting the forecast at $1.15 in a report where these analysts added that the target “may be understating” the decline.
However, that did not mean that there weren’t others going so far as to warn that the pound could be in danger of falling as far as parity with the dollar.
Allianz economist Mohamed El-Erian warned that British politicians were failing in their responsibility to provide a swift and credible “Plan B” that would include a free trade agreement with Europe.
“The future value of sterling is a function of how and how quickly the structural uncertainty is resolved – if Plan B is delayed and/or it doesn't involve much of a free trade set-up with the EU, it is not inconceivable for sterling to head to parity with the U.S. dollar,” he warned.