Pessimism about sterling’s prospects overdone

In contrast to some forecasters who have suggested that the pound could reach parity with the euro before the end of the year, we expect sterling to reverse some of its recent losses against the euro. For a start, we don’t share other forecasters’ pessimism about the prospects for economic growth. Indeed, if the economy outperforms the 1.2% growth rate anticipated by the consensus in 2018 (our forecast is 2.2%), then there is clearly scope for a growth-supported rise in sterling. At the same time, there is a limit to the extent that improving sentiment towards the euro-zone’s economic recovery can continue to provide a fillip to the single currency. What’s more, we think that investors are underestimating the amount of monetary tightening that will be required by the UK MPC over the coming years. As such, we think that there is scope for the pound to rise from its current rate of about €1.10, to around €1.13 at the end of the year and to €1.17 by the end of 2018.