Investors Still Protecting Themselves from Potential Brexit
Paul Hollingsworth, UK Economist at Capital Economics, on ‘Brexit' and GBP
According to the latest polls conducted across the UK, the ‘Remain' campaign continues to strengthen its position among voters ahead of the June 23 referendum. Still, in your opinion, is there a chance that the UK will vote to leave the European Union or not? Why?
While bookmakers' betting odds currently suggest that the UK will vote to remain in the EU by a significant margin in the refer-endum, the opinion polls have tended to be a lot closer, suggesting that the remain and leave camps are roughly neck and neck. The key point though, is that on most polls, there are still 10-20% of voters who are undecided. There is still a number of weeks before the referendum takes place, and there is a lot that could sway the vote either way. Accordingly, while I suspect that when it comes down to it, we will vote to remain, there is still a significant chance of a ‘Brexit'. Indeed, investors are still seeking to protect themselves and policymakers are drawing up contingency plans.
What factors (except ‘Brexit') will influence the performance of the Pound this year?
Even if the UK votes to remain in the EU, we think that other factors will put the Pound under renewed pressure later this year. First, although we expect rates to rise in both the US and UK at a faster rate than is currently priced into markets, we think that the Fed will tighten more aggressively than the Bank of England over the next few years. Second, investors could turn their attention to the UK's enormous current account deficit. Doubts about its sustainability could weigh on the Sterling.
What are your forecasts for GBP/USD and EUR/GBP for the Q3 of 2016 and in a longer term?
For the GBP/USD currency pair we would expect to see the level of 1.45 by the end of Q3 this year. The EUR/GBP we see trad-ing at 1.32 for the same period. As concerns longer term forecasts, we could see the Pound trading at 1.30 against the US Dollar and at 1.30 against the Euro for the end of 2017 respectively.