GBP/USD: Vulnerable S/T; Set For A Strong Rebound In H2 - BTMU

During February the pound weakened further against the US dollar in terms of London closing rates from 1.4174 to 1.3935, notes (the Bank of Tokyo-Mitsubishi) BTMU. 

"The dominant factor was the escalation of uncertainties related to ‘Brexit’ with a referendum deal reached between the UK and the EU and a referendum confirmed for 23rd June.

We believe the pound is set to remain very vulnerable ahead of such a major uncertain event. As of Q3 2015, flow data confirms that nearly the entire current account deficit on an annual basis was financed by net FDI inflows and the ‘Brexit’ referendum is likely to see those flows dry up considerably. The uncertainty may also be reflected in worsening business and consumer sentiment readings. Our fair-value estimate for the pound is around the 1.6000-1.6500 level and hence is already notably under-valued. However, further declines are very likely given the scale of uncertainty ahead," BTMU argues.

"Assuming though that the UK votes to ultimately remain in the EU, we expect a sharp rebound. Our Q4 2016 GBP/USD forecast is 1.4700," BTMU projects. 

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