GBP/USD: En-Route To 1.22 In 3 Months
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As a function of the UK's "Leave" decision at the June 23 Brexit referendum, our economists have materially downgraded their expectations for the UK and European economies vis-à-vis the rest of the world. In the same context, we are making material revisions to our forecast set.
Having been wrong about the outcome of the referendum, we are lowering our 3-month GBPUSD forecast to 1.22 from levels 1.58 previously. This is consistent with the "leave" outcomes we expected when we previewed the possibility back in January .
We believe the UK economy's well-documented fiscal and current account deficits, combined with the fact that GBP is not especially cheap, leave room for still more GBP weakness. And while the current account would tighten if UK domestic demand falls as the economy heads towards recession, the fiscal picture would become even more of a headache given the likely negative output gap that would materialize. If the BoE responds with a rate cut and QE resumption as we expect, GBP will have fresh reasons to move still lower.
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