This summer’s market trends insight - from Investec
by Alexander Beard, on Sep 21, 2016 12:23:47 PM
Sterling fell sharply immediately after the UK’s 23 June vote to leave the EU. GBPUSD slumped from $1.49 the day of the Brexit vote to $1.32 the following Monday. We think that the decline reflects two factors. First, heightened uncertainty about the UK’s future economic relationship with the EU has raised the risk premium associated with UK assets. Second, the Bank of England, fearing a post-vote economic slowdown, has cut the Bank rate – from 0.5% to 0.25% – and has expanded its Quantitative Easing (QE) programme. Indeed, outlook for the Bank rate ahead is now for a period of sustained very low Bank rate whereas previously the start of policy normalisation had been on the horizon. Since the immediate aftermath of the vote, GBPUSD has tended to trade within a fairly narrow range, between $1.29 and $1.33.
We think that currency markets are pricing in continued post-referendum uncertainty, a slowing in the economy and a continuation of loose monetary policy. This is in line with our view – we forecast the economy to grow by +1.8% this year and +0.8% next year (although we think the UK will avoid a recession, consistent with some encouraging signs in recent data). Meanwhile, we see the Bank of England reducing the Bank rate further in November, from 0.25% to 0.10%.
We would not rule out some further weakening towards the end of the year, as we expect the BoE to cut rates at its 3 November meeting and for the US Federal Reserve to raise rates at its 14 December meeting. But, broadly speaking, we expect sterling to maintain its current (weaker) path. Our forecast is for GBPUSD to end the year between $1.25 and $1.30, before ending next year at $1.31. Movements will be driven by the evolution of the economy – stronger (weaker) than expected growth might see sterling rise (fall). However if the government’s Brexit negotiations unravel messily, there could be a further sell-off.
Continued weakness in the pound will clearly benefit UK residents earning dollar incomes, but will hurt US residents receiving sterling incomes. But, despite the uncertain post-referendum landscape, softer sterling could offer an opportunity to clients looking to make investments in UK assets, such as property. Clients should be wary of economic developments and the upcoming Brexit negotiations, which should determine sterling’s fortunes going forward. Investec Bank provides an award winning Private Client Foreign Exchange service to Alexander Beard clients to manage their ongoing international transfers.
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