EUR and GBP: How Vulnerable on Brexit? – Rabobank

EUR and GBP: How Vulnerable on Brexit? – Rabobank

7 April 2016, 13:18
Roberto Jacobs
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EUR and GBP: How Vulnerable on Brexit? – Rabobank

Jane Foley, Research Analyst at Rabobank, suggests that the only G10 currency to have underperformed the USD this year is the British pound and although a spate of weak UK economic data at the start of the year was responsible for some of the losses, since the middle of February politics has taken over as the greatest influence on the pound.

Key Quotes

“The jittery condition of the pound has been in clear evidence this week. Although a broader soft USD allowed GBP/USD to avoid another push below the 1.40 level yesterday, EURGBP broke above 0.80 returning to levels not seen since the middle of 2014 when the decision by the ECB to adopt a negative discount rate triggered a long-lasting assault on the EUR.

Since political uncertainty has negative connotations for investment it is not difficult to explain why fears of a Brexit have been pressuring the pound. In February, popular politician and London mayor Boris Johnson threw his weight behind the ‘Leave’ campaign. His decision jolted the market into the realisation that a success of the ‘Leave’ campaign at the June 23 referendum of EU membership was a tangible possibility.

In recent weeks, the EU poll of polls published by ‘What the UK Think’ has been consistent in signalling that the vote is spilt around 51% for the ‘Remain’ vote vs. 49% of the ‘Leave’ camp. As we have argued before, this result may be a source of greater celebration for ‘Leave’ voters since according to the PM’s Political Strategist Crosby, polls are indicating that one quarter of those favouring ‘Remain’ are unlikely to vote. Given that uncertainty about the outcome is compounded by the large quantity of ‘undecideds’, the vote could go either way. It is possible that the ‘Leave’ campaign could find further support from yesterday’s Dutch referendum which returned a ‘no’ vote.

Although it is the UK economy that is most at peril to slower growth resulting in any trade tariffs following a Brexit, various EU countries would also be subject to downside risks. More importantly, the result of the Dutch referendum illustrates that the EU is facing political disharmony even from within its core. This can only be enhanced by a Brexit. On the heels of Europe’s immigration crisis and the temporary borders which have been imposed by some EU countries there is a risk that Brexit could deal the coherence of the EU a heavy blow.

Our published FX forecasts assume that the UK will return a ‘Remain’ vote in June and for this reason we are forecasting a bounce in the pound vs. both the EUR and the USD on a 3 mth view. That said, from the perspective outlined above it is clear that any Brexit could have negative implications not just for the pound but for the EUR meaning a Brexit is likely to have negative implications for EUR/USD. While we see risk that Brexit could conceivably knock GBP/USD down by around 12% from current levels, it is possible that EUR/USD could drop 2% or so on such an outcome.”


(Market News Provided by FXstreet)

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