The British pound may soon hit $1.40 as expectations grow that a 2nd referendum will be held on whether Britain will remain in the European Union with the chances of a reversal in decision of the previous referendum a distinct possibility.
Many analysts believe that if a second referendum is announced, the pound could rocket upwards from current levels and investors would be wise to hedge themselves against such moves in the Sterling.
Further interest-rate hikes, which are expected from the Bank of England, will also support the pound and on current fundamentals some say the currency is undervalued at the moment.
“Our base case sees GBP/USD meandering in a 1.30-1.40 range in 2018, with EUR/GBP following EUR/USD higher through 0.95. Considerable bad news is already priced in, and Sterling is already ‘cheap’ on most valuation metrics,” notes Olivier Korber, a strategist from Société Générale (PA:SOGN) in Paris.
“A GBP/USD fall to the 1.20 low would require, above all else, a stronger Dollar rather than a weaker Sterling alone. We think the chances of a fall that far are about 5%, whereas we see the probability of GBP/USD appreciating through 1.40 at around 15%,” added Korber.
CPI figures released earlier today from the UK hit the market strongly, coming in at 3 percent, which is higher than the Bank of England would like to see and raises the possibility the central bank may raise rates again at their board meeting next month to try and keep inflation under control.
Retail sales figures due out later this week are also expected to come in strongly which will only add to the case for a rate hike.