UK: And so it begins - ING

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Mar 9, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    James Knightley, Senior Economist at ING, notes that the UK Prime Minister David Cameron got his “deal” from the other European leaders and has confirmed that the UK’s referendum on ongoing EU membership will be held on Thursday 23rd June.

    Key Quotes

    “Unfortunately for him, he was met by a barrage of negative press headlines with the Daily Mail’s front page screaming “The Great Delusion!” and the Daily Express declaring that “Cameron’s EU Deal is a Joke”. He also had several of his ministers state that they didn’t back the deal and would campaign to leave the EU, while Boris Johnson, prominent MP and current Mayor of London, is also campaigning for the UK to leave.

    Neither the deal, nor the clear split in the Conservative Party have had a material impact on the opinion polls though, which suggests that the outcome remains too close to call.

    Our view remains that the UK will very narrowly vote to remain in the EU on the basis that there is a large proportion of the electorate who are undecided (around 20% of the population).

    We are already seeing some damage from uncertainty the referendum brings. Consumer confidence has fallen, dragged lower by a sharp drop in optimism on the economy over the next 12 months while sterling has fallen 9% on a trade weighted basis. Market interest rate expectations have also fallen further, given that one likely implication of the UK voting to leave is that the Bank of England would try to shore up sentiment by cutting interest rates.

    We see further downside risk for sterling and are concerned that the uncertainty may lead to businesses delaying hiring and investment until after the referendum has passed. We have trimmed both our growth and inflation forecasts to reflect this growing possibility while lower utility bills mean that inflation is likely to be slightly lower than we had previously expected.

    Assuming we are correct and the UK does vote to stay in the EU we suspect that hiring and investment will rebound in subsequent quarters while sterling weakness will have boosted international competitiveness and growth prospects for 2017.

    With the uncertainty having been cleared we also think that the Bank of England will be more inclined to start tightening monetary policy. We suspect inflation could rise swiftly through 2017 given sterling’s plunge, our forecast for rising commodities and a tight UK labour market that could see wage growth accelerate.”
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