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SCENARIO FOR STERLING

In light of last week’s BoE meeting, we have left unchanged our forecast for the pound, and continue to expect a drop in the near term (one month) followed by a subsequent recovery (3-months onwards).

From now until to the referendum day, on a one-month horizon, sterling should weaken, due both to mounting uncertainty in the run-up to the referendum, and to economic data, which in the next few weeks are expected to outline further slowdown in 2Q 2016. The downside vs. the dollar might go to GBP/USD 1.40-1.38.

After the referendum, assuming that the UK remains part of the EU, sterling should start to climb back, thanks to the removal of uncertainty on the outcome of the referendum, and to the fact that the clearing of risks of a further slowdown of growth (associated with a potential victory of the Brexit camp) would allow the countdown to the BoE’s reversal on rates to resume. Initially, the recovery would be slow and modest, probably to between GBP/USD 1.40 and 1.45 on a 3m horizon, as growth would remain moderate for a while.

Subsequently, the joint improvement of the growth and inflation outlooks, on the other hand, should aid a rise towards GBP/USD 1.50-1.55 on a 6m-to-12m horizon, where the first BoE rate hike could be implemented (between 4Q 2016 and 1Q 2017).

Against the euro, the pound’s weakest phase would mostly be concentrated in the near term, on a 1m horizon, i.e. between now and the referendum, with downside potential extending to EUR/GBP 0.80-0.82, especially in the event of disappointing data and/or an increase in the percentage of “leave” voting intentions, based on survey data (all the more so if at the same time the share of undecided voters should decrease). Following the referendum, only assuming the “remain” camp wins, the expected recovery against the dollar should also extend to the euro, towards EUR/GBP 0.75-0.73, driven by the prospect of the BoE being the fir central bank to hike rates after the Fed.

In case of a victory of the “leave” campaign, on the other hand, sterling would depreciate, against both the dollar and the euro: see our previous publication “Forex G10 – Sterling” of 29 April.

GBP Sterling, BoE, forecasts, GBP, Sterling, British pound,currency watch, analysis, currencyfx trader, forexhttp://www.fxtradermagazine.com/images/1-GBP-Sterling,-BoE,-forecasts,-GBP,-Sterling,-British-pound,currency-watch,-analysis,-currencyfx-trader,-forex.png

http://www.fxtradermagazine.com/images/2-GBP-Sterling,-BoE,-forecasts,-GBP,-Sterling,-British-pound,currency-watch,-analysis,-currencyfx-trader,-forex.pnghttp://www.fxtradermagazine.com/images/3-GBP-Sterling,-BoE,-forecasts,-GBP,-Sterling,-British-pound,currency-watch,-analysis,-currencyfx-trader,-forex.png

http://www.fxtradermagazine.com/images/4-GBP-Sterling,-BoE,-forecasts,-GBP,-Sterling,-British-pound,currency-watch,-analysis,-currencyfx-trader,-forex.pnghttp://www.fxtradermagazine.com/images/5-GBP-Sterling,-BoE,-forecasts,-GBP,-Sterling,-British-pound,currency-watch,-analysis,-currencyfx-trader,-forex.pngSource: Thomson Reuters-Datastream

Luca Mezzomo / Chief Economist
Asmara Jamaleh / Economist – Forex Markets
Intesa Sanpaolo Research Department

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