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10 Feb 2016
GBP: How low can it go - Rabobank
Jane Foley, Research Analyst at Rabobank, notes that in spite of this morning’s release of a -1.1% m/m plunge in UK December industrial production, sterling is holding on to a better tone vs. the EUR.
Key Quotes
“That said, in the year to date the pound is the third worse performing G10 currency after the NZD and the AUD. In part the dismal showing of sterling since the start of 2016 reflects the money market’s current belief that there is no chance of a Bank of England rate rise this year.
Last month BoE Governor Carney was candid in his remarks that “now is not yet the time to raise interest rates”. Although it can be argued that Carney was aligning his views with those of the market, dovish expectations continued to gain ground so that by last week the futures market was pricing in a greater chance of a rate cut this year than a rate hike.
Given the weight of dovish expectations already in the market, it is likely that the impact of UK data misses will be limited in the near-term. With this in mind we would expect that sterling could find greater direction in politics in the near-term.
Whether or not the UK electorate is facing an early June referendum on EU membership is likely to be clearer by the end of this month.
Political uncertainty irrespective of its source can be a dampener to investment. This implies that the further the UK appears to move away from EU, the greater the downside potential for sterling.
The best case scenario of sterling bulls is thus a successful Remain vote at an early June referendum. An early referendum has the benefit of cutting short the period of uncertainty and thus should reduce volatility this year. However, Cameron has hinted that he may not call a referendum until 2017 if he believe there is a high risk of a vote to leave the EU. This suggests that volatility could be extended.
Our forecast that EUR/GBP can push lower to 0.74 on a 6 mth view assumes an early referendum and a vote to remain within the EU. On any other outcome the risks to further upside for EUR/GBP beyond 0.80 rises considerably.
The latest poll of poll published by What UK Thinks implies the Remain campaign has 52% of the vote compared with 48% for Leave. However, the failure of opinion polls to accuracy predict the outcome of the recent UK general election supports the view that the vote could still go either way meaning that volatility in sterling is likely to remain heightened.”
Key Quotes
“That said, in the year to date the pound is the third worse performing G10 currency after the NZD and the AUD. In part the dismal showing of sterling since the start of 2016 reflects the money market’s current belief that there is no chance of a Bank of England rate rise this year.
Last month BoE Governor Carney was candid in his remarks that “now is not yet the time to raise interest rates”. Although it can be argued that Carney was aligning his views with those of the market, dovish expectations continued to gain ground so that by last week the futures market was pricing in a greater chance of a rate cut this year than a rate hike.
Given the weight of dovish expectations already in the market, it is likely that the impact of UK data misses will be limited in the near-term. With this in mind we would expect that sterling could find greater direction in politics in the near-term.
Whether or not the UK electorate is facing an early June referendum on EU membership is likely to be clearer by the end of this month.
Political uncertainty irrespective of its source can be a dampener to investment. This implies that the further the UK appears to move away from EU, the greater the downside potential for sterling.
The best case scenario of sterling bulls is thus a successful Remain vote at an early June referendum. An early referendum has the benefit of cutting short the period of uncertainty and thus should reduce volatility this year. However, Cameron has hinted that he may not call a referendum until 2017 if he believe there is a high risk of a vote to leave the EU. This suggests that volatility could be extended.
Our forecast that EUR/GBP can push lower to 0.74 on a 6 mth view assumes an early referendum and a vote to remain within the EU. On any other outcome the risks to further upside for EUR/GBP beyond 0.80 rises considerably.
The latest poll of poll published by What UK Thinks implies the Remain campaign has 52% of the vote compared with 48% for Leave. However, the failure of opinion polls to accuracy predict the outcome of the recent UK general election supports the view that the vote could still go either way meaning that volatility in sterling is likely to remain heightened.”