Sterling extended this week's two-month highs against the euro on Friday and held its ground against a broadly stronger dollar, feeding speculation that this year's post-Brexit referendum slump may have run its course for now. While most banks and investors expect weaker growth and turbulence around talks on leaving the EU to weigh on the pound next year, a number have begun to argue that a 20 percent fall since last December is enough to deal with Britain's large external deficit and help rebalance the economy.
Sterling was on course for its third straight weekly gain against both the euro and the Bank of England's trade-weighted basket of currencies on Friday. "I do think sterling's fall may have run its course," said Mark Burgess, chief investment officer at Columbia Threadneedle Investments in London.
"We do have to deal with the current account deficit, but you would think this might be enough." The pound gained around a third of a percent to 85.29 pence per euro in morning trade in London, its highest since mid-September. It was also marginally higher at $1.2428.
Analysts from Dutch bank ABN Amro pointed to models quoted by the Bank of England's Kristin Forbes in 2014 that suggested a 20 percent decline in the currency would reduce the current account deficit by 2 to 6 percentage points, compared with a deficit that averaged 5.5 percent of GDP over the past four quarters. "The fall in sterling seen up until now would shrink the current account deficit to sustainable levels," they said in a note to clients on the pound. "Despite the uncertainty in the upcoming period, we think that sterling is at attractive levels from a long-term perspective. Our new year-end forecast for GBP/USD is 1.25."
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