The pound trading at $1.50 may seem like a distant memory, yet a few voices see it fully recovering from the Brexit sell-off.

A weaker pound will support growth and restore balance in the U.K. economy, while the country will be able to strike a deal in exit talks with the European Union that maintains its competitiveness, said Stephen Jen, chief executive of investment company Eurizon SLJ Capital Ltd. The pound may take a couple of years to return to a pre-Brexit level, he said.

“We will not lose sight of this view,’’ said Jen, a 20-year veteran of foreign exchange markets. “The U.K. is going to perform very well outside the European Union, but this is a long term view. Brexit could be a very interesting journey for the two parties involved.”

And:

U.K. Prime Minister Theresa May will face an array of demands from EU nations in negotiating Britain’s future relationship with the bloc, according to a Bloomberg analysis of the region’s 27 other members. Jen said the City of London did not attain its status because of the U.K.’s EU membership, but for its rule of law, transparency, use of English and labor market flexibility.

“How can Paris become a financial center if you can’t fire anyone there?” Jen said.

David Fuller's view

I will quibble with the “Rare Brexit Optimist” opening in the headline above.  There are many Brexit optimists although they recognise the need for good governance in dealing with near-term challenges of uncertainty and also assisting the UK’s long-term GDP growth potential. 

As for Sterling’s performance, it is understandably acting as a safety valve during Brexit uncertainty.  Next year and beyond, its performance will vary against other currencies in line with relative economic expectations.

Stephen Jens only compares GBP/USD in the article above.  No country wants a strong currency in a slow growth deflationary environment.  However, some countries can stand currency strength more than others.  I maintain that the Dollar Index is in a secular bull market, having ended its secular bear trend in 2008.  US investment banks are no longer the casinos of earlier years.  While the US political environment is somewhat unsettling, the economy’s comparative advantages of cheap energy and a runaway lead in many technologies underpin long-term potential for relative economic stability.  The US Treasury and Federal Reserve are trying to hold the Dollar in check, at least until the global economy is stronger.  Consequently it may be a number of years before Sterling clears $1.50 for any length of time.       

GBP/EUR is now very competitive near current levels of €1.164.  An important reason for the Euro’s strength is its role as the world’s second most liquid reserve currency.  However, this remains a headwind for  EU economies.  Therefore, GBP’s downside risk against EUR is probably limited to the possibility of a temporary overshoot due to current speculation.  Over the medium term, short covering and a stronger outlook for the UK economy could push GBP/EUR back above €1.30 well before we see GBP/USD above $1.50.  I would not expect a clearly stronger Euro until Southern European countries drop out of the single currency which then begins to resemble Deutsche Mark lite.