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GBP: The shock from Brexit - ING

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Jan 28, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

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    FXStreet (Delhi) – Research Team at ING, suggests that the UK Prime Minister David Cameron has a knack of winning the votes that matter, however, his luck may run out with the upcoming referendum on EU membership.

    Key Quotes

    “The initial suggestion was that the referendum will be held by the end of 2017, but it could come as soon as this summer if a deal is agreed at the European Council meeting on 18 and 19 February. The assumption is that Mr Cameron can then tell the electorate that he has won a “better deal for Britain” that will convince a majority of Britons to vote in favour of keeping the UK in the EU at a June referendum.

    Irrespective of the outcome the uncertainty that the vote will generate is likely to see a loss of momentum in the UK economy – possibly knocking around a quarter of a percent off 2016 growth. Both UK and foreign businesses are likely to take a “wait and see” approach to hiring and investment while consumer spending and confidence could weaken modestly. The Bank of England will sit on its hands and sterling is likely to continue softening in the build-up to the vote – touching 1.32 versus USD.

    Should the UK vote to leave, Brexit raises clear risks for trade and investment and, by implication, growth and jobs. 2017 GDP growth could slow to 1.5%, some 1.2% below what it might have been, EUR/GBP would likely move towards the 0.90 mark and the Bank of England may loosen monetary policy. This outcome could also fuel the campaign for Scottish Independence, which would compound the effects.

    The damage might prove short-lived. A trade deal would need to be agreed within two years and bi-lateral deals agreed with non-EU countries. Once the situation stabilises, growth prospects should improve - helped by a weaker currency and low interest rates, but the BoE may be forced to subsequently tighten policy aggressively to combat inflation risks. The UK’s prospects would then be driven by what the post-Brexit Conservative government tried to do with its new found “freedoms”.

    The loss of the UK would negatively impact the EU’s own economy and runs the risk of boosting the campaigns of anti-establishment parties elsewhere. This suggests that the process of deeper European economic and political integration could reverse.”
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