GBP/USD: Hold on Tight - Rabobank

GBP/USD: Hold on Tight - Rabobank

7 June 2016, 07:12
Roberto Jacobs

GBP/USD: Hold on Tight - Rabobank

Jane Foley, Research Analyst at Rabobank, suggests that the strength of the US economy and the wider implications for the EU of the UK’s membership referendum have wide ranging implications for global asset markets.

Key Quotes

“The soft tone of the dollar has offset some of the negative pressure on cable stemming from the latest twist in the build up to the UK’s EU membership poll. A new YouGov opinion poll regarding the UK’s June 23 EU referendum is suggesting that the Leave vote has 45% of the vote compared with 41% for the ‘Remain’ campaign. The What UK Thinks poll of poll which is a moving average of six of the most recent polls is today indicating that the ‘Leave’ camp have 51% of the vote compared with 49% for ‘Remain’. This is a dramatic shift from two weeks ago when the ‘Remain’ campaign appeared to be gaining momentum and sterling was reacting with a relief rally. Relative to its late May low EUR/GBP has rallied by 4.5%. Sterling’s loss vs. the USD is a more muted 2.8% over the same time frame.

On the assumption that the UK electorate votes to remain within the EU, we see scope for EUR/GBP to be trading close to the 0.75 level on a 1 mth view and for cable to bounce towards 1.51. While a Remain vote would sweep away a huge amount of political uncertainty in the UK, some would remain. Not only has the EU campaign widened a deep divide within the ruling conservative party but it has heightened speculation about a change in party leadership. The EU referendum thus threatens to leave a nasty legacy of political discord irrespective of its outcome which has the potential to weigh on GBP during the second half of the year.

How far cable could dip in H2, however, is likely to be guided by events pertaining to the US. Expectation about the strength of the US economy and the pace of Fed rate hike will remain a dominating force for the US, but the outlook may be complicated by the US Presidential election in November. A Reuters/Ipsos opinion poll released on Friday suggests that Clinton would likely win 46% of likely voters vs. 35% for Trump. Given that Clinton’s policies have been well publicised a continuation of her lead would likely serve to keep political uncertainty at bay. Any other outcome, however, could lead to a sharp increase in USD volatility as political uncertainty shifts across the Atlantic. This scenario would likely offer GBP/USD support.”


Share it with friends: