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GBP: Sterling likely to dance to the tune of Brexit referendum - Rabobank

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Jan 5, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

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    FXStreet (Delhi) – Jane Foley, Research Analyst at Rabobank, suggests that last month an ICM opinion poll indicated that 42% of British voters would prefer to stay in the EU while 41% would rather leave.

    Key Quotes

    “The poll also indicated that substantially more were inclined to vote for exit if PM Cameron fails to reform rules regarding migrants’ right to live and work in the EU. Sterling has been a poor performer over the past month or so reflecting both the political risk and the recent spate of poor UK economic data. Concerns triggered by the downward revision of Q3 GDP growth at the end of last month to 0.4% q/q from 0.5% q/q have been underpinned by release of worse than expected UK December manufacturing PMI survey.”

    “Slowing growth combined with weak inflation suggests the BoE is likely to maintain a cautious approach to interest rate policy. This morning sterling has benefitted from some short-covering. That said, even though the UK curve still offers a relatively attractive yield compared with its Eurozone counterparts, we expect that sterling’s ability to perform well this year is likely to be countered by the forthcoming EU referendum. We have moderated our forecasts for EUR/GBP this year and now see a move to 0.70 on a 12 mth view with upside risk dependent on the evolution of political risk.”

    “While political concerns may provide headwinds to sterling this year, they may have the opposite impact on the EUR. Unlike the UK, the Eurozone runs a substantial current account surplus and this can have an influential impact on currency flows. Last June, Greek political uncertainties had the effect of strengthening rather than weakening the EUR as short positions were reduced. The bursting of the Chinese stock market bubble strengthened the EUR even further.”

    “Consequently even on an escalation of tension regarding the coherence of the EU, the EUR may remain well supported by an increase of demand for core EZ assets. Conversely, we would expect a rise in risk appetite to undermine the EUR which would likely be used to fund carry trades. It follows that the range of geopolitical risks facing investors this year may serve as a support for the EUR. While we expect interest rate differentials to guide EUR/USD lower, we expect the EUR to be reluctant to give up ground and for the EUR/USD1.04 level to provide tough support.”
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