One week after the big Brexit crash and as a new quarter begins, it is time to lift our heads from the near term and look forward.
Here are forecasts for the next month, 3 months and 12 months:
GBP/USD in July 2016
Uncertainty has an immediate impact on financial markets and also on business, studies, work decisions etc. with a recession clearly on the cards starting in the quarter that begins today. Uncertainty comes from the political situation in Westminster, a potential breakout of the UK and the EU response.
On the monetary front, we have a clear commitment from Carney and co. to provide support. This will probably come in the form of more QE as negative rates have consequences on bank profitability. This new QE and the expectations for its implementation in August are pushing the pound lower as UK bond yields slide. And despite the political uncertainty regarding the future of the UK and the leadership in Westminster, both leading Tory candidates are committed to Brexit. At least for now, a second referendum or a rejection of Brexit in parliament seem unlikely.
All in all, this leads to a weaker pound with a slip under 1.30 coming sooner rather than later. A further drop towards 1.26 is on the cards within the next month. We will likely see big falls accompanied by occasional strong corrections. The moves could resemble this first full post-Brexit week.
GBP/USD in Q3 2016
Within three months we will have much more certainty, but this does not mean brighter prospects for the pound. By late September, the new PM will have already laid out his or her plans regarding Article 50, the Brexit path and budget adjustments. We will also have the BOE’s stimulus kicking in, supporting the economy.
However, we will also have the hard data regarding the economic contraction expected in the summer. While a lower pound supports tourism and exporters, the uncertainty during these months will likely have overwhelmed the British economy.
On the other side of the pond, we could have hints of a rate cut also in the US, keeping the picture more balanced. I expect a wide trading range between 1.20 and 1.30, with cable closing Q3 around 1.23.
GBP/USD through Q2 2017
There are lots of moving parts. This includes Fed prospects, Article 50, Scotland, Northern Ireland and the European reaction.
Prospects for elections in France and Germany during 2017, the way they deal with Brexit, austerity policy and the ECB’s actions will also come in the cable mix.
There certainly is light at the end of the tunnel for cable. This depends on the character of the negotiations. If the UK adopts the “Norwegian model” which implies all the current obligations and benefits of EU membership without officially being a member and taking part in decisions, the pound will certainly recover. This is certainly plausible as the economic downturn will push the public and the government to try to hold on to current arrangements rather than changing them altogether.
In this scenario, there is room for cable to recover towards 1.40 or even 1.45 even though lots of damage has already been done.
In case that neither the UK leadership nor the European one provide a clear path, things could get worse. The heightened uncertainty and potential rise of populist forces in Europe and in the US could fuel further flows to the safe haven USD and JPY, leading cable closer to 1.10.