The British pound has been falling against the UAE dirham since April due to fears of a hard Brexit and a global trade war between the US and EU countries, making the UK currency undervalued, analysts said.
Going forward, it is believed that Brexit talks will be the most important factor that will dictate pound's movement against the dirham. A soft Brexit will push the pound towards 5.3 and a hard Brexit could result in the currency hitting 4.4 against the dirham.
Hence, analysts are advising British expats in the UAE to remit now as current rates are at an attractive level.
Hussein Sayed, chief market strategist at ForexTime (FXTM), sees the pound's direction is far from certain in the second half.
"After reaching its highest level since the Brexit vote in mid-April, most factors turned against the pound. For example, the dollar appreciated by more than 6 per cent; economic indicators have also started pointing south, with slowing consumer spending and weak wage growth and there has been a decline in inflationary pressures," he said.
Meanwhile, according to Sayed, the risk of a disorderly or 'no-deal' Brexit has grown with the recent political mess, which was the key factor behind the pound's fall.
"So, from a fundamental perspective, I think the pound is undervalued, and should be around $1.4 [5.2 against the dirham] by year-end, but it largely depends on the path Brexit negotiations take."
He said the base case scenario is the pound reaching Dh5.14 by the end of second half from the current 4.84, a 6 per cent increase.
"This is under the condition of reduced political risks, improved economic data and a soft Brexit by March 2019. However, there's likely to be lot of volatility and I won't rule out a decline towards Dh4.4 if negotiations break down. The best-case scenario would see the pound marching towards Dh5.5, but I would only put a 10 per cent probability on this happening."
The pound has suffered its worst three-month period in the second quarter since the vote to leave the European Union in June 2016. It plunged from a low of 5.2 against the dirham on April 17 to a high of 4.76 on July 19, falling by about 8.5 per cent. On Friday, it closed at 4.8.
Rajiv Raipancholia, CEO of Orient Exchange, predicted that the pound could go as high as 4.75 and as low as 5.26 during the second half of the year. "The pound/dirham level of 4.75 to 4.76 will be a very good level for British expats to remit to UK," Raipancholia said
"Ongoing Brexit negotiations with the EU created some uncertainty about a hard Brexit or soft Brexit for the UK from the EU. But ultimately the UK will likely get a benefit out of Brexit and the pound will strengthen in the long run. It is expected to reach a level of 5.25 against the dirham."
Adeeb Ahamed, managing director at LuLu Financial Group, believes that the UK currency has become unpredictable. Hence, it's expected to move between 4.6 and 5.3 against the dirham in the next six months.
Ahamed said going forward, political announcements in relation to the Brexit deal will be a prime driving force for the pound's movement in the market.
"Furthermore, interest rate hikes by the Bank of England, the general economic numbers in play in the UK along with the US dollar's movement against all other currencies can also further influence the pound rate," he added.Raipancholia believes that the ongoing Brexit talks, interest hikes by the US, the expected interest hike by the Bank of England, the trade war between the US and other countries and the resultant currency war as is happening now between the dollar and Chinese yuan are a few important factors likely to drive the pound in the second half.
Sayed said the pound will be dictated by a number of factors including political issues, economic data and monetary policy. "However, Brexit negotiations will definitely continue to be the number one factor driving the pound," he concluded.
By Waheed Abbas
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