Sterling could reach $1.50 on the back of a Brexit transition deal, 7IM’s chief investment officer Chris Darbyshire says.
Tomorrow Theresa May will deliver a much-anticipated speech in Florence, which it is hoped will drive forward the stagnating Brexit negotiations.
It is expected that May will offer the EU €20bn during a two-year transition period to break the Brexit deadlock and advance the fourth round of Brexit talks that are due to start on Monday.
Darbyshire says a transition deal to preserve the status quo is “the most likely outcome”.
“I think $1.50 is a foreseeable level for sterling if Brexit continues along these lines,” Darbyshire says. “British industry has been seeking this kind of an arrangement to alleviate uncertainty and reduce the costs of transitioning to the new order. It would also buy the Government crucial negotiating time.”
Darbyshire says the 7IM portfolios are positioned for sterling to strengthen further to mitigate the damage it could do, with a “lower-than-usual” exposure to foreign currencies and call options on the exchange rate between the pound and the dollar. Sterling is currently at $1.35.
“If sterling rises rapidly, any foreign currency positions would fall in value, plus large-cap UK stocks would underperform in sterling terms. This double whammy would reverse the post referendum gains that UK investors enjoyed.”