JPMorgan have updated their foreign exchange rate forecasts for 2016, downgrading their British pound projections, including the headline pound to dollar rate.
The standout point in the January forecast note concerns a notable cut to JPMorgan’s forecasts regarding the British pound:
“To reflect the enhanced risk of Brexit hedging and a more benign BoE outlook we are cutting our GBP forecasts, substantially for 1H.”
The cut comes a week after we reported on similar moves made at Credit Suisse, in fact the discourse on the UK's referendum over continued EU membership has been bought forward sharply over recent weeks with the U.K Prime Minister suggesting a summer referendum is possible.
Meanwhile, the sterling has been sold agressively as investors take out hedges to protect against a Brexit; something that has grown more real with polls showing those in favour of leaving are now a firm majority.
The pound to dollar exchange rate forecast for the first half of 2016 is cut to 1.32 from 1.45, EUR/GBP is raised substantially to 0.78 from 0.71 previously.
Moderate forecast changes are made for year-end (GBPUSD to 1.54 rather than 1.57).
The cuts come as a number of institutional analysts are forced to re-evaluate their prior calls on the pound. “GBP has suffered a dramatic fall from grace since the middle of November - the cumulative 7% drop in the trade-weighted index in fact marks GBP’s worst performance since the tail-end of the financial crisis in late-2009,” note Morgan Stanley.
Indeed, only a handful of EM currencies and oil producers have fared worse over this period.
JPMorgan say Brexit risks surrounding the EU referendum are largely behind the changes to the forecast.
“By far the most important factor undermining the exchange rate has been an enhanced focus on the UK’s impeding EU referendum. We have been recommending short GBP exposure through cash and options since mid-November as we believed that Brexit risk was underpriced, not only in the spot rate but also in the level of volatility and the skew for GBP puts,” says Paul Meggyesi at JPMorgan.
Indeed, currency traders to appear to be pricing in an EU exit with latest polling data showing the desire to leave is now favoured.
Elsewhere, euro forecasts are left unchanged as the threat of further European Central Bank (ECB) easing is negated by the support the shared currency enjoys in risk-off market conditions stemming from China.
Meanwhile, US dollar forecasts are largely unchanged except for against the likes of the Australian, New Zealand and Canadian dollars.
“The bias around USD forecasts versus emerging markets and commodity currencies is to the upside given events in China,” says John Normand at JPMorgan.
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