The pound is being picked as a top currency bet for 2020 by Wall Street, based on a win for the ruling Conservatives in next month’s election breaking a deadlock over Brexit.
Sterling will climb nearly 8% by the end of 2020 to $1.39, a level not seen in over 18 months, according to the latest prognosis by Bank of America Merrill Lynch, which chimes with peers such as Morgan Stanley.
That forecast assumes the Conservatives seizing an outright majority in the Dec. 12 vote, removing some of the Brexit uncertainty that has left sterling “significantly undervalued.”
The U.K. currency has been the best performer against the U.S. dollar in the second half of this year, with traders paring back their expectations of a no-deal departure from the European Union. The Conservatives are ahead in most polls, with Prime Minister Boris Johnson aiming to use an election majority to get his Brexit deal through Parliament and exit the bloc by the deadline of Jan. 31.
“The ferocity of the move is indicative of a market that is keen to avoid missing what could potentially be the start of meaningful trend appreciation in sterling,” wrote Bank of America strategists led by John Shin. “With the removal of uncertainty, pound-dollar should move towards $1.40.”
Sterling traded around $1.29 on Wednesday, having climbed 5% versus the dollar since the end of September.
Other major U.S. banks also favor betting on a pound rally. Morgan Stanley has a recommendation to buy the currency against the dollar as one of its top 10 trades for 2020, targeting $1.40 in the first quarter. JPMorgan Chase & Co. sees $1.33 by mid-year, while Goldman Sachs Group Inc. sees a rally to $1.35 in coming months if the Conservatives win a majority that moves Brexit forward.
It’s not the first time that the pound has been one of the highest conviction trades for the year. Bank of of America Merrill Lynch was among several at the end of 2017 to recommend investors snap up the pound, betting on a rally the following year. Instead, it fell nearly 6% against the dollar.
A debate between Johnson, who talks about “unleashing the potential” of the U.K. with his Brexit deal, and opposition Labour Party leader Jeremy Corbyn on Tuesday evening was widely seen as a draw that is unlikely to shift the needle. Most polls see the Conservatives leading by double digits, though similar figures before the last election in 2017 failed to predict a surge by Corbyn that stripped the Conservatives of their parliamentary majority.
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