KUCHING: The British pound is pegged to exhibit strengthening signs against the ringgit and the US dollar as researchers identify several key drivers for the strength.
Against the Malaysian ringgit, researchers with AmBank Bhd (AmBank Research) expect the pound to exhibit a strengthening mod likely due to the expected continued rate hike in 2018 and 2019 by the Bank of England.
In the case of Malaysia, it saw that the monetary tightening was coming to a mature stage with the policy rate envisaged to normalise at 3.50 per cent, providing another upside of 25 basis points.
Meanwhile, it also projected a stronger pound against the US dollar in 2018 and 2019 but not without volatility along the path driven by noises.
“Besides, we envisage the US bond yields rising rather than falling partly due to a tightening monetary policy, which offsets some of the need for the US dollar to depreciate.
“We expect the pound-US dollar to be on a strengthening mode for 2018. We expect the currency to hover around 1.435, with room for it to reach the 1.445 levels.
“In our projection, we foresee it gaining from 1.402 end-March to our projection of 1.420 end-June and reach 1.430 end-September before settling at 1.450 end-December.”
In 2019, AmBank Research believed the pound will remain strong against the US dollar, adding it should strengthen to 1.49 by end-2019.
“We believe the pound-US dollar will reach 1.460 end-March and further strengthen to 1.470 end-June, and 1.480 end-September before settling at 1.490 end-December.”
Since the pound-US dollar trend started exhibiting its appreciation momentum in 2017, AmBank Research believed the strengthening momentum should last until 2023 when the currency should peak.
Apart from macro fundamentals, it said the long-term strengthening momentum of the pound-US dollar is also being supported by a weaker US dollar long-term momentum.
Key drivers for this optimism comes as Brexit-related headwinds to domestic demand are expected to abate in 2018, and the economy is expected to regain traction on strong global and European growth.
“We envisage the UK’s gross domestic product (GDP) to grow by 1.9 per cent in 2018 supported by improving consumer confidence as well as business and investment sentiments, better public finances and a continued recovery in manufacturing and exports on the back of stronger global GDP.
“Inflation is now easing although it is still above the two per cent target. Wages are improving. A combination of these two is likely to see real wages increase, giving more disposable income to the households that should see an increase in spending. It will be due to improving consumer confidence,” AmBank Research said.
“With the unemployment rate at a three-decade low and inflation though easing, is still above the two per cent target from the Bank of England, it depicts inflationary pressure coming from the demand side,” it observed.
“This encourages the central bank to raise interest rates in 2018. We are looking at a rate hike in May and another either in November or December.
“Improving public finances is a positive pull factor for investors, and a boon for the GBP. We expect the UK’s combined current account surplus and fiscal deficit to improve in the next two years. This will provide support to the pound, and can result in a moderate overvaluation.
“Investors are expected to chase faster growth and rising returns which should support the pound, given an improved risk appetite added with a fairly mature stage of the US economic cycle.”