The Pound might be reaching a peak and fall far enough against the Euro to record fresh multi-year lows in 2018, argues new analysis.

Brexit is losing its vice-like grip on the British Pound argues new analysis from global investment bank TD Securities, who say ‘traditional’ drivers are likely to hold sway over coming months.

There is some good and bad in this view for those readers hoping for a stronger Pound:

The good: Brexit might have now done its worst and the Pound should therefore be protected from eye-watering falls.

The bad: The Eurozone economy is on a roll, and should outperform the UK on a relative basis suggesting the Euro is likely to strengthen.

The analysis comes at a time of appreciation for the Pound-to-Euro exchange rate which has rallied from sub-1.08 reached in mid-August, back to a high just north of 1.14 in September.

The recovery has predictably piqued the interest of those looking to buy Euros and many are asking that age-old question: Will the Pound go higher?

“We continue to see challenges for the GBP ahead, particularly on the EUR front,” says Ned Rumpeltin, European Head of FX Strategy at TD Securities in London.

Brexit a "Slow-Burn Story"

Looking forward, Rumpeltin continues to see Brexit as a significant risk for the GBP, “but this remains a slow-burn story.”

Other considerations have moved to the fore and TD Securities think it may take a significant deterioration in negotiations for Brexit headlines to return as a durable determinant of GBP performance.

In fact, if anything, the Brexit process might be the source of potential Pound upside.

“With over a year still to run until tangible deadlines enter an investible horizon from a currency market perspective, sterling may remain more sensitive to positive developments than negative ones - at least for now,” says Rumpeltin.

Traditional Drivers

As mentioned, despite some positive developments on the Brexit scenario from the Pound’s perspective, there are other drivers to take into consideration with Rumpeltin saying “more traditional factors” are “in the driver’s seat.”

Top of the list is the Bank of England which is now expected to hike twice in the coming months, depending on upcoming data releases.

Recall, it was the Bank of England’s September update that flagged the prospect of an imminent interest rate rise when the market were expecting such a move in 2019.

Sterling rallied as markets played catch-up.

“We see a firmer GBP ahead, in particular against USD,” says Rumpeltin who sees this story playing out further.

TD Securities see GBP/USD ending this year at 1.38 and next year at 1.43 as the USD passes its cyclical peak.

But against the Euro, Sterling should drift lower, “reflecting the more fundamental challenges underlying the UK economy vis-à-vis its Euro counterpart.”

The Eurozone economy has started to accelerate just as the UK economy eases back from a period of outperformance. This relative advantage handed to the Euro should allow the European Central Bank to exit its stimulus programme over coming months.

Recall, it is the €60BN-a-month money printing programme that has kept the Euro undervalued for years now. Exiting the programme will free the Euro to recover and achieve a fairer valuation and the analyst community is in agreement that the October ECB meeting should communicate an intention to exit the programme.

TD Securities forecast the Euro to “drift slightly higher from here to 0.91 by end-year and 0.95 by end-2018.”

This gives us a Pound-to-Euro exchange rate target of 1.10 and 1.05 which suggests a new multi-year low beckons.

The forecast is well below consensus which see Sterling-Euro's low at 1.10.

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