Pound to Euro exchange rate reference (5-5-17): 1.1697Pound to Dollar exchange rate reference: 1.2468Traders are likely to give Pound Sterling one more dunk before allowing it to recovers to 'fairer' levels we are told at the head of a new month and financial quarter.

Analyst Kamal Sharma at Bank of America Merrill Lynch Global Research says rhe risks for GBP remain high and we disagree with some observers that believe that the triggering of A50 has somehow removed the veil of uncertainty.

“We disagree with this narrative and would indeed argue that the uncertainty has only just begun,” says Sharma.

Indeed, we have noted a number of prominent financial analysts argue that now the Brexit process is finally underway layers of uncertainty will finally start to be be scraped off the Pound’s windscreen.

Added clarity will allow the Pound to recover argue Barclays who forecast the currency to climb as high as Sterling’s recovery to commence in the second quarter of 2017.

But others are in agreement with the stance forwarded by Sharma and his team at BofA Merrill Lynch.

Nick Verdi a Senior FX Strategist at Standard Chartered bank has gone as far as describing Sterling’s recent strength as an “aberration”.

“The UK-specific risks of Brexit negotiations suggest that short squeezes in GBP will prove to be aberrations on a downward trajectory,”

While we remain bearish on GBP-USD, upside surprises to UK economic data or encouraging noises on the UK’s Brexit negotiations with the EU could drive an outsized and violent short squeeze,” says Verdi.

One Last Dip for the Pound

With the UK’s Parliament taking time off for Easter the lull in Brexit-based news is likely to be depressed further which might induce a false sense of security for the Pound.

For Bank of America it would be churlish to simply assume that the UK-EU will converge to a mutually optimal solution as this would ignore the strong political dynamic which will initially reinforce both sides' respective positions.

The first hurdle appears to be the sequencing of talks.

PM May made clear in the A50 letter that the UK government wishes to run divorce talks and trade negotiations concurrently.

The EU has stated its preference to settle the divorce bill before proceeding to trade negotiations.

Some observers believe that these polar opposite positions risk stalling negotiations in their early stages.

“Markets have been happy to trade the positive conciliatory tone of PM May for much of the run up to A50. That could be tested in the coming weeks if cracks in the perceived harmony,” says Sharma.

It is for this reason that Bank of America are comfortable with their view that one final dip in GBP will occur before recovering into the end of the year.

“The macro pillars which have historically supported GBP suggest that the currency remains fundamentally undervalued,” says Sharma.

Forecasts: Pound Lower but Risks Skewed to Upside

But, they do appear nervous that they might be overplaying the negativity.

“We do concede, however that the risks to GBP are skewed to the upside,” says Sharma.

The Pound to Dollar rate is forecast at 1.15 by mid-2017, 1.16 by the third quarter, 1.19 by the end of the year and 1.20 by the end of the first quarter of 2018.

The Pound to Euro exchange rate is forecast at 1.1236 by mid-2017, 1.1364 by the end of the third quarter where it should stay through to the end of the year and into the end of the first quarter of 2018.

By contrast, Barclays who we noted as being bullish on the Pound, anticipate the Pound to Euro exchange rate to rise to 1.19 by mid-year, 1.2345 by the end of the third quarter and 1.2820 by the end of 2017.

By March 2018 the exchange rate is forecast to be at 1.3158.

The Pound to Dollar exchange rate is forecast to trade at 1.30 by mid-year, 1.31 by the third-quarter of 2017, 1.32 by the end of 2017 and 1.38 by March 2018.

Elswhere in the research community, HSBC have made a tactical recommendation to clients that they consider selling it on any rallies in anticipation of an intensification of political risk, the structural headwind of the current account deficit and possible signs of softness in the economic cycle.

HSBC have previously recommended that GBP-USD is to be sold at 1.2540 - very close to the 1.2450 seen at the time of writing.

“Those not already engaged in GBP may be tempted to wait for better levels to sell, somewhere in the 1.2700-1.2850 region where it last topped out,” says HSBC's David Bloom.