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21 Dec 2015
Pound volatility, but appreciation should win out in the end - MUFG
FXStreet (Delhi) – Research Team at MUFG, suggests that 2016 should be an interesting year for the pound with as the BOE is likely to begin raising the official Bank Rate for the first time since July 2007 and the UK is likely to hold a referendum on whether to remain or leave the EU.
Key Quotes
“On a year-to-date basis, the trade-weighted pound (BOE Broad Index) is 4.4% stronger after posting gains of 2.0% and 3.3% in 2013 and 2014 respectively. Taking the 2007 high to the post- Great Financial Crisis low in 2009, the pound at its current level has retraced a touch more than 50% of that 2007-09 plunge.”
“The path for the pound may well end up being a tale of two halves. In the first half of next year, predicting that path may prove difficult with opposing forces at play. On the one hand we expect the current ambivalence of the BOE to fade and for the rhetoric to shift clearly toward monetary tightening being required, which should help support the pound. But on the other hand, there is an increasing probability that the ‘Brexit’ referendum will take place in 2016, possibly in June, and the uncertainty related to this key event will likely weigh on the pound.”
“That uncertainty comes at a time when the UK external position is in large deficit and hence any slowdown in portfolio inflows and FDI inflows could reinforce pound depreciation. In percentage of GDP terms the current account deficit reached 5.1% in Q2 2015, up from 4.8% to Q2 2014.”
“But the good news is that the UK economy is still growing solidly, the output gap is closing, nominal and real wages are picking up with a record number of people employed.”
“So the first half of 2016 is likely to see greater pound volatility as the BOE begins to signal a shift in monetary stance while uncertainty related to the ‘Brexit’ referendum increases. GBP/USD could fall to the low 1.4000’s during this period but ultimately we make two assumptions that should mean by mid-year GBP/USD is above the 1.5000 level – firstly the BOE tightens policy in May and secondly the “Remain” campaign wins the “Brexit” referendum in June. We then see further upside in H2 2016 with year-end GBP/USD and EUR/GBP targets of 1.5600 and 0.6800.”
Key Quotes
“On a year-to-date basis, the trade-weighted pound (BOE Broad Index) is 4.4% stronger after posting gains of 2.0% and 3.3% in 2013 and 2014 respectively. Taking the 2007 high to the post- Great Financial Crisis low in 2009, the pound at its current level has retraced a touch more than 50% of that 2007-09 plunge.”
“The path for the pound may well end up being a tale of two halves. In the first half of next year, predicting that path may prove difficult with opposing forces at play. On the one hand we expect the current ambivalence of the BOE to fade and for the rhetoric to shift clearly toward monetary tightening being required, which should help support the pound. But on the other hand, there is an increasing probability that the ‘Brexit’ referendum will take place in 2016, possibly in June, and the uncertainty related to this key event will likely weigh on the pound.”
“That uncertainty comes at a time when the UK external position is in large deficit and hence any slowdown in portfolio inflows and FDI inflows could reinforce pound depreciation. In percentage of GDP terms the current account deficit reached 5.1% in Q2 2015, up from 4.8% to Q2 2014.”
“But the good news is that the UK economy is still growing solidly, the output gap is closing, nominal and real wages are picking up with a record number of people employed.”
“So the first half of 2016 is likely to see greater pound volatility as the BOE begins to signal a shift in monetary stance while uncertainty related to the ‘Brexit’ referendum increases. GBP/USD could fall to the low 1.4000’s during this period but ultimately we make two assumptions that should mean by mid-year GBP/USD is above the 1.5000 level – firstly the BOE tightens policy in May and secondly the “Remain” campaign wins the “Brexit” referendum in June. We then see further upside in H2 2016 with year-end GBP/USD and EUR/GBP targets of 1.5600 and 0.6800.”