EUR and GBP: How Vulnerable on Brexit? – Rabobank
Jane Foley, Research Analyst at Rabobank, suggests that the only G10
currency to have underperformed the USD this year is the British pound
and although a spate of weak UK economic data at the start of the year
was responsible for some of the losses, since the middle of February
politics has taken over as the greatest influence on the pound.
Key Quotes
“The
jittery condition of the pound has been in clear evidence this week.
Although a broader soft USD allowed GBP/USD to avoid another push below
the 1.40 level yesterday, EURGBP broke above 0.80 returning to levels
not seen since the middle of 2014 when the decision by the ECB to adopt a
negative discount rate triggered a long-lasting assault on the EUR.
Since
political uncertainty has negative connotations for investment it is
not difficult to explain why fears of a Brexit have been pressuring the
pound. In February, popular politician and London mayor Boris Johnson
threw his weight behind the ‘Leave’ campaign. His decision jolted the
market into the realisation that a success of the ‘Leave’ campaign at
the June 23 referendum of EU membership was a tangible possibility.
In
recent weeks, the EU poll of polls published by ‘What the UK Think’ has
been consistent in signalling that the vote is spilt around 51% for the
‘Remain’ vote vs. 49% of the ‘Leave’ camp. As we have argued before,
this result may be a source of greater celebration for ‘Leave’ voters
since according to the PM’s Political Strategist Crosby, polls are
indicating that one quarter of those favouring ‘Remain’ are unlikely to
vote. Given that uncertainty about the outcome is compounded by the
large quantity of ‘undecideds’, the vote could go either way. It is
possible that the ‘Leave’ campaign could find further support from
yesterday’s Dutch referendum which returned a ‘no’ vote.
Although
it is the UK economy that is most at peril to slower growth resulting
in any trade tariffs following a Brexit, various EU countries would also
be subject to downside risks. More importantly, the result of the Dutch
referendum illustrates that the EU is facing political disharmony even
from within its core. This can only be enhanced by a Brexit. On the
heels of Europe’s immigration crisis and the temporary borders which
have been imposed by some EU countries there is a risk that Brexit could
deal the coherence of the EU a heavy blow.
Our published FX
forecasts assume that the UK will return a ‘Remain’ vote in June and for
this reason we are forecasting a bounce in the pound vs. both the EUR
and the USD on a 3 mth view. That said, from the perspective outlined
above it is clear that any Brexit could have negative implications not
just for the pound but for the EUR meaning a Brexit is likely to have
negative implications for EUR/USD. While we see risk that Brexit could
conceivably knock GBP/USD down by around 12% from current levels, it is
possible that EUR/USD could drop 2% or so on such an outcome.”
(Market News Provided by FXstreet)
