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- Pound-to-Euro exchange rate: 1.1595

- Pimco turn more bullish on Sterling as 'no deal' Brexit risks recede

- Blackrock see increased demand for Sterling-based assets

Pimco, the largest bond fund in the world, has started buying more Pounds, according to Geraldine Sundstrom, managing director and portfolio manager at the fund.

The portfolio manager is more confident in buying Sterling because of the low probability of a ‘no-deal’ Brexit, saying “this would push you to be a little bit more overweight on UK Sterling currency and underweight Gilts, in general.”

Previously, asset managers had steered clear of Sterling and most Sterling-denominated assets (except for large caps which benefit from a weak Pound because of their multi-national reach) out of fear of a 'no deal' Brexit materialising.

But following moves by Parliament to prevent a ‘no-deal’ and the subsequent reaching of a deal between Boris Johnson and his EU counterparts, the risks of a ‘no-deal’ have dramatically declined.

“We are not too sure exactly what will happen but certainly we have a better idea of what will not happen,” says Sundstrom. “And I think this has made us a little bit more comfortable in assigning a rather large probability that a cliff-hard Brexit will not happen.”

Blackrock, the largest asset manager in the world, has also noticed an increase in interest in its clients for purchasing Sterling-denominated assets following recent positive Brexit developments.

“We have definitely seen investor interest come back into UK domiciled assets: UK equities, in particular, with a preference for mid and small cap because of the positive correlation with Sterling,” says Wei Li, head of ishares EMEA investment strategy at Blackrock.

Li says that the almost zero percent probability of the UK crashing out without a deal means Sterling has a ‘floor’ but to go much higher investors would need more clarity on Brexit implementation and/or the probable outcome of a general election.

“For Sterling to go significantly higher we would need more news over whether a revised time schedule could potentially speed up the legislative process or around clarity in terms of an election, which is looking increasingly inevitable,” says Li.

Renewed interest in UK assets is likely to be tempered by continued uncertainty surrounding how the new trade relationship between the UK and Europe - and UK and the rest of the world - will look in reality.

“Even if we do end up agreeing on an exit deal, that is just the beginning of a lengthy process that has yet to start around negotiating future trade relationships with the EU and the rest of the world, so I think we are in for a prolonged period of uncertainty for a long time, and I am definitely not expecting a ‘V’ shaped rebound,” says the Blackrock strategist.

Pimco thinks there are wider, global, forces at play that impact on investment decisions regardless of Brexit, and that these may be signaling a possible ‘late-cycle bounce’.

“There is a chance of a late-cycle rebound but what you really have to look at is the U.S - China relations. This is what, on a global scale, has dampened investment and capex, and, therefore, this is where one should look at,” says Pimco’s Sundstrom.

The improvement in trade relations between the superpowers is a positive development that should help investor risk appetite.

That, as well as greater monetary and fiscal easing, means there is a “decent chance of a cyclical bounce towards the start of 2020,” says the portfolio manager.

HSBC, one of the largest currency dealers in the world, also now sees a floor under Sterling due to the low probability of a hard-Brexit, although it sees new risks to the currency from a general election.

“The main current downside risk to GBP centres on the possibility of a general election and the associated uncertainty,” says Daragh Maher, head of research at HSBC.

The probability of a general election hinges on the length of the delay the implementation of Article 50 decided on by the EU.

If the EU decides the delay should last till January 31 Boris Johnson has said he will call a general election. If it is a short delay there probably won’t be an election.

Currently, Ireland has said it favours a January 31 deadline and France, a shorter 2 week delay, to November 15.

In the event that a deal is agreed and implemented smoothly, HSBC expects GBP/USD to spike to 1.35 and then 1.40-45 eventually.

It is more positive about the prospects for investment in UK companies in the scenario where the UK enters a smooth Brexit, despite the continued uncertainty over how the final relationship will eventually look.

HSBC say the focus for Sterling would shift from politics to economic data.

“HSBC’s economists note that this could boost business investment and consumer confidence, while lower inflation from a stronger GBP could help support real incomes,” says Maher.

The stronger economy envisaged would result in the Bank of England (BOE) probably shifting its stance to more hawkish, meaning in favour of higher interest rates.

This would support the Pound since higher interest rates generally attract greater foreign capital inflows attracted by the higher returns, and this boosts demand for the currency.

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