Less than two days before the referendum on UK membership of the EU leaves us even more hostage to fortune than usual, but we expect to see sterling lower by the end of 2016, regardless of the outcome.
The UK economy was losing momentum before the referendum was announced and is still doing so.
We do not expect the MPC of BoE to be able to raise interest rates in the current cycle at all – a long period of neutral policy seems assured. That’s good for gilts, not so much for the pound.
Cable to weaken further in H2:
Fed on the other corner waiting desperately to discharge market expectations on rate hikes after Brexit outcome which would factor in the forecast for the EUR/USD (lower) by Q4, that is in turn keeps the EUR/GBP forecast marginally softer and pushes sterling weakness into the GBP/USD.
While UK PMIs (all segments manufacturing, construction, and service) in recent times have not been that encouraging that could signal healthy business prospects.
This pair has tracked relative interest rates more closely than any other G10 currency pair in recent years and, if anything, has lagged the move in rates during the last couple of months as sterling has benefited from a short-covering rally in the run-up to the EU vote.
If we just infer the correlation in the GBP/USD of the last few years, forecasts for 2-year interest rate differentials (widening from 17bp currently to over 50bp by year-end and 90bp in mid-2016), the GBP/USD could be headed below 1.35 by year-end and closer to 1.25 by mid-2017.
Thus, our core strategy will be to stay short GBP against the EUR and USD on any post-referendum bounce, assuming we see a ‘remain’ outcome that takes the EUR/USD and GBP/USD higher.
On an exit scenario, both the GBP/USD and EUR/USD are likely to fall, and keep on falling. On a UK ‘Exit’ we are likely to see GBP/USD test 1.25 this year, and indeed, the EUR/USD could fall sharply too (to 1.05). That would take EUR/GBP towards 0.85.
The material has been provided by InstaForex Company – www.instaforex.com