The pound is already down 10 per cent against the dollar, which is totally normal for a developed markets currency pair, but it could get worse.
In summary, you are now entering The Forex and nobody really knows what’s going to happen. That said, for entertainment purposes at the least, have some guesswork from our inboxes.
We’ll add them as we see them…
Our currency strategists now forecast GBP-USD to be 1.20 and GBP-EUR to be 0.92, by end- 2016. From an economics point of view, the big question is whether funding the UK’s huge current account deficit becomes a problem and, in turn, maintains downward pressure on GBP.
Sterling could fall by another 12-15% on a trade-weighted basis, to 1.25 against the US dollar. Winners would be the Japanese yen and the US dollar, with the euro probably in the middle.
Beyond the knee-jerk reaction of markets, the likely path of GBP is unlikely to be a straight line. There is scope for additional downside towards 1.32, but some profit-taking on shorts and a return of market liquidity could prompt a moderate recovery in GBP/USD in the very short run. In previous FX shocks in the UK, GBP declined 10-15% on a tradeweighted basis over subsequent months, and we would not be surprised to see a similar decline this time (see Figure 5 of Brexit carries a recessionary risk, 9 February 2016). This suggests that the 1.30-1.32 could likely form a base, and any extreme breaks to 1.20-1.25 could provide a very compelling entry point for long positions.
We continue to look for GBP/USD to trade in a 1.30-1.35 range for now (i.e. a little lower than here) and eventually, towards 1.20-1.25. EUR/GBP will rise further and indeed has already risen faster than our initial estimates, but we don’t expect a move to 0.90 (from 0.83 now).
Barc in table form:
We expect that GBPUSD is likely to decline as low as 1.30, while the Q3 ’16 and Q4’16 forecasts have been lowered to 1.35 and 1.38 respectively. EURGBP is forecast at 0.82 and 0.80 over these horizons. The traditional safe havens, the JPY and CHF, will probably continue to strengthen.
In our view, it is reasonable to expect that sterling will settle in the mid 1.30s level against the US dollar until some clarity emerges. Beyond this level, we would note that sterling would be significantly undervalued and markets would probably be reluctant to sell.
In the near term DB expects a 15% fall in the Stoxx 600 (to 295), an immediate fall in the Bund yield by around 10bps to -15bps, a 5-6% fall in Sterling trade-weighted today (already there) and a move to $1.30 by the end of the month and $1.15 YE 2016, peripheral banks assets and especially bank equities to come under pressure and finally the iTraxx Main to widen 25bps over the coming days. In other words not a pretty picture. However what we don’t know is what the authorities around the globe will do, so central banks and governments need to be carefully watched today and over the next few days. Their impact could change momentum or even intensify it if they struggle to find the appropriate response.