Have markets overreacted? UBS sees GBP recovery in 2017

The economist from UBS, Dean Turner and his team believe that the GBP recovery is going to take place in 2017. They provide a list of reasons for that. Will this become true?

20 October, AtoZForex According to Swiss UBS, Sterling has the potential to recover from its historic low point by the next year. Dean Turner, the economist at UBS believes that the cheap Pound now will cause the currency to disobey the expectations and rebound.

Pound was one of the worst-performing in 2016

This Monday, the Pound has fallen to its lowest against the Euro, below €1.10 level. In addition, the UK currency has also depreciated against the US dollar, as it hit the below $1.22 levels, a drop of 20 percent since the EU referendum.

Analysts have named the Pound one of the worst performing currencies this year, as a number of banks believe that the situation for Pound can get even worse. For example, HSBC experts stated that the Pound will most likely reach parity with Euro by 2017. Another bank also believes that the Pound will continue dropping, as the Deutsche bank foresees the Sterling to decline below $1.15 by the end of 2016.

UBS projects GBP recovery in 2017

Yet, when Dean Turner and his team conclude that “the pound’s joyride is probably not over as traders react to every twist and turn of the Brexit debate,” they highlight that the currency might “stabilize and recover over the next six to 12 months.”

Furthermore, the UBS experts predict the Sterling to edge up to $1.36 in the one-year period. The average price for Pound in the first half of 2016 was recorded as $1.43. Moreover, Mr. Turner and his team believe that there are prospects for Pound to recover in 2017, and they provided a number of reasons for the possible rally. Why is this recovery possible?

Markets expect the “hard” Brexit

Firstly, the analysts at UBS stated that the markets have overreacted, as they expect the “hard” Brexit, which will possibly lead to a recession the UK economy. However, UBS believes that both the outcomes are not very likely to happen. The analysts have stated:

“Both sides can be expected to make uncompromising demands that are initially poles apart. As the talks proceed, compromises will be made as they always are. Economic common sense should prevail. Among the items at stake are some GBP 222bn of goods and services that the UK exports to the EU, and approximately GBP 290bn worth imported by the UK from the continent.”

If the talks will start heading in the direction, the Sterling would most likely to recover.

Traders will hesitate on shorting Pound

UBS experts’ team believes that the Pound is currently undervalued, as they say, that the rate at which it can be exchanged for other currencies is too low.

Even if such big discount is not very likely to end soon, traders are expected to start double-checking before they place a new shirt position on Pound, according to UBS.

International markets are attracted by the UK assets and bonds

A drop in Pound implies that the UK assets, such as companies, property, and bonds are now more attractive for the international investors.

Dean Turner has added on this matter:

“Whether or not the fall in sterling sufficiently compensates for the uncertainties around Brexit is as yet unclear, only time will tell. But if this proves to be the case, then demand from overseas could pick up, which could be a supportive factor for the currency.”

Weaker Pound to shrink the current account deficit

UBS experts believe that the weaker Sterling has the potential to shrink the UK current account deficit, which is now at the near record level. The fact that the UK’s current account deficit is present means that the value of a country’s imports of services and goods is greater than the value of its exports. This condition is considered to be risky for the economy stance, as it can be dangerous for the country to have the large current account deficit.

When the currency drops, the experts in the country become more competitive, where the imports become more expensive. The UBS team believes that this condition would lead to higher levels of higher level of experts and lower levels of imports, which would ultimately decrease the current account deficit in the UK.

This, according to UBS analysts, would act as another reason for GBP recovery in 2017.

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