Pound set for quarterly gain yet Brexit blurs outlook

Bloomberg

The pound headed for its first quarterly gain versus the dollar since mid-2015 as data showed the currency’s Brexit decline delivered a double boost for the UK economy.
A bumper contribution from trade saw the nation’s gross domestic product grow an unrevised 0.7 percent in the fourth quarter, its fastest pace in a year, data showed. In the same period, the current-account deficit narrowed sharply to 2.4 percent of GDP, the least since 2011.
Sterling, which earlier in March was 2017’s worst performing Group-of-10 currency, has now climbed over the Norwegian krone, Canadian dollar and the New Zealand dollar. The currency’s resilience could falter given the uncertainty around the process of the UK leaving the European Union, analysts warned, with a Bloomberg survey forecasting the pound will drop to $1.21 by mid-2017.
The British currency has been supported by better-than-expected UK economic data in recent months and the fact that markets were already excessively short of it after the EU referendum. However, the pound is still “biased for further downside moves,” according to strategists including Richard Grace at Commonwealth Bank of Australia.
“This is due to interest rate spreads moving in favor of the dollar and the UK’s enormous current-account deficit,” they wrote in a client note. “The forthcoming Brexit negotiations hold significant headline risks for GBP exchange rates. We expect both sides to maintain a strident tone at the start of the negotiations” CBA predicts GBP/USD to fall below $1.20 by June this year and to $1.05 by March 2018; says there is an upside risk to their call as speculators have accumulated record net short GBP positions and GBP is “historically cheap from a real effective exchange rate perspective.
So if Brexit negotiations turn out to be less hostile than expected, GBP will be vulnerable to a short covering rally” EU leaders will warn the UK that any attempt to lure companies with lighter regulation and tax policies will damage the prospects of striking a trade deal with the bloc, according to draft negotiation guidelines.
These guidelines were “in line with expectations overall but likely to disappoint the GBP bulls out there,” write analysts at Nomura International Plc, including Jordan Rochester “For markets there are no positives versus what was expected, with the possibility of a transition phase included, but for the future free trade agreement to not be agreed to until after Brexit is completed (i.e. after March 2019)”.
The pound may stay within its post-flash crash range for some time to come as market positioning allows room for investors to fade rallies and strong UK data support the downside, Bloomberg strategist Vassilis Karamanis writes GBP/USD is little changed at $1.2463; the pair is on course for about 1.0% rise in the quarter ending March 31, the first appreciation since 2Q 2015Resistance at 1.2524, March 30 high and 61.8% Fibonacci of March 27-29 fall; support at 1.2403, March 30 low EUR/GBP rises 0.2% to 0.8577 Yield on 10-year gilts rises 1 bp to 1.14%, set for 10 bps drop in 1Q.