Sterling: Current account fears exaggerated, political focus to pivot - RBS

Analysts at RBS expect the sterling trade weighted index to recover further in 2017 as political and current account deficit fears are exaggerated. 

Key Quotes

“Upside potential greater against the Euro than the US Dollar. US/European political events to be an unusually important driver of primary Sterling bilateral exchange rates next year.”

“US election result a net positive for the UK’s trade position. Higher/steeper global yield curves also a positive driver of UK current account position. Bank of England has broken the negative policy vortex and this is GBP positive.”

“EURGBP downside risks to 0.81 by end-17 as constrained Euro area fiscal policy implies ECB monetary policy easing stays as the lead policy lever. Euro area political cycle also set to apply additional downside pressure. GBPUSD outlook dependent on Fed’s reaction function to USD gains and the impact of higher interest rates on global financial market conditions. Recovery chances greater in H2’17, potentially as high as 1.36.”

“An off-cycle General Election and significant delay to Article 50 enactment is not in our baseline. Primary downside Sterling risks 1) disappointing growth mainly through its impact on relative yields and 2) current account funding difficulties.”