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“Heightened uncertainty” over Britain’s divorce with the European Union could be the trigger that sends the pound even lower, making it more attractive for investors to buy, according to UBS Global Wealth Management.
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The pound has been trading above the 1.30-level against the greenback over the past month. But increased uncertainty could send the sterling to levels of about 1.24 or 1.15 against the U.S. dollar, said Tan Teck Leng, a foreign exchange analyst at UBS.
The EU and the U.K. on Thursday agreed to a flexible extension of the Brexit deadline, pushing it to Oct. 31. That would allow U.K. Prime Minister Theresa May more time to garner Parliament backing for a withdrawal agreement, take the country out without a deal, or cancel Brexit altogether.
“We don’t think that Theresa May is able to get the current deal through the U.K. parliament. It is not likely to happen and with that, it opens the door to general elections,” Tan told CNBC’s “Street Signs” on Thursday.
“Is that higher or lower uncertainty? It is a lot higher because you don’t know the parties, if they were to campaign, are they going to campaign on a harder Brexit or softer Brexit,” he added.
“If you get a no-deal Brexit, it is not going to be 1.24, it is going to be 1.15 or below — that is the reality. Now, what can take the pound down to 1.24? The simple trigger would be just pure heightened uncertainty,” he added.
He explained that the U.K. heading into general elections will likely introduce greater volatility into the currency markets. That will result in the pound trading in a wider range, with the possibility of touching 1.24 against the U.S. dollar — that’s “the opportunity for you to buy pound cheaper,” said Tan.
Some investors have stayed away from trading the pound due to uncertainties on how the U.K. would leave the EU. Jasslyn Yeo, global market strategist at J.P. Morgan Asset Management, said she’s been taking a “wait-and-see” approach on the currency.
Yeo said she has also remained “cautious” on European stocks as a whole, partly due to Brexit.
“We continue to remain cautious on European equities especially over a 12- to 18-month time horizon. But that’s not just because of Brexit, there are other reasons,” she told CNBC’s “Capital Connection” on Thursday.
One concern cited by Yeo is the potential earnings disappointment among European companies. She explained that margins — an important driver for earnings — are likely to suffer because of higher wages in Europe. In addition, economic outlook for Europe is “challenging,” she said.
One concern cited by Yeo is the potential earnings disappointment among European companies. She explained that margins — an important driver for earnings — are likely to suffer because of higher wages in Europe. In addition, economic outlook for Europe is “challenging,” she said.
The International Monetary Fund this week cut its growth forecast for advanced economies in Europe. The fund projected the euro area — consisting Germany, France, Italy and Spain — will grow by 1.3 percent this year, 0.3 percentage points lower than its January estimate.