UBS, HSBC Forecast Parity in Euro to Pound Sterling Exchange Rate

If the UK votes to leave the EU than the EUR to GBP conversion will hit equality suggest two forecast notes.

There is a 40% chance the euro to pound exchange rate will hit parity in 2016 say UBS.

Analysts at the bank have told clients that the euro and pound will be on equal footing should the UK vote to leave the European Union, of which there is now a 40% chance of happening.

The forecast comes hot on the heels of a similar call made by the team at HSBC who say the chance of a British exit from the EU are now too high to ignore.

“We have studied where we think EUR/GBP will end the year, depending on the result of the UK referendum on EU membership. We find that EUR/GBP should either move to around 0.73, or to parity, depending on the result of the vote,” says John Wraith, UK Rates Strategist at UBS.

UBS, like most other institutions, are working off the base assumption that the UK will remain in the EU and have set a baseline forecast for EUR/GBP at 0.73 for the end of 2016.

“However, we expect some further weakness of sterling between now and the vote on 23 June,” says Wraith.

But a vote to leave would push EUR/GBP to 1.00.

“The price action so far makes it clear that sterling would weaken in the event of an exit vote,” says Wraith, “we think that the market would re-price to parity – and to the extent that it could accommodate a shift in the current account by 2.7% of GDP.”

An ‘In’ Vote to Shoo in Bank of England Interest Rate Rise, Support GBP

The baseline forecast for 0.73 at the end of 2016 relies on the observation that UK economic data remains firm, and an assumption that the Bank of England will likely bring forward an interest rate rise in the event of the UK staying in Europe.

“If the people of the United Kingdom vote to remain in the EU then, it seems likely that the market would start to anticipate Bank of England rate rises once more and that sterling would strengthen to prior levels,” says Wraith.

The Markets Have Not Fully Priced in Brexit, More Losses Likely

According to UBS, at current levels (0.7851) the pound sterling is still to rich against the euro.

This will come as bad news for those out there who have been holding out for a better exchange rate and have instead received a pummelling.

“Today sterling is probably still a little strong. Opinion polls give us a 40%
chance that the referendum result is for the UK to leave the EU. That should mean EURGBP trading at about 0.84,” says Wraith.

Put another way, the market is now pricing roughly a 25% chance of exit (assuming that the result of the vote is taken as final).

“With the available evidence this seems low to us,” says Wraith.

HSBC Forecast Parity in EUR/GBP

HSBC currently see a one in three chance that the UK votes to leave the EU and the impact on the currency will be where Brexit will be most acutely felt.

The bank have warned that such odds are too significant to ignore and there is a the prospect of a 15-20% slide in the GBP to USD exchange rate in the event of a Brexit.

"We also think that the GBP would come under pressure against the EUR," say HSBC, "indeed, EUR-GBP could move towards parity in the aftermath of a Brexit vote," say HSBC.

BUT

Having read the research from both HSBC and UBS there is one element missing - the potential negative impact on the euro.

Markets and commentators are increasingly coming around to the idea that a Brexit will be a big negative to the future structure of the European Union, and this implies downside currency risks.

Barclays have warned in a note that the euro potentially has more to lose on a UK Out vote.

Quantifying the impact on the euro is understandably harder to predict because of the amount of moving pieces in the European Union at present.

Indeed, with the migration crisis shaking European political stability one can see how a British exit could well turn the tremmors into an earthquake.

The only certainty we have at this stage is that 2016 will produce much excitement in foreign exchange markets. 

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