Back
19 Feb 2016
GBP: Spin it to win it - Rabobank
Jane Foley, Research Analyst at Rabobank, suggests that if PM Cameron’s drive for EU reform is successful in drawing support from all other EU leaders, he is expected to call a referendum on UK membership of the EU as soon as June 23.
Key Quotes
“This means that the EU leaders summit that starts today in Brussels potentially marks the start of an intense period of campaigning by the UK’s ‘Leave’ and ‘Remain’ campaigns.
For sterling the next few months promise to be marked by volatility and, dependent on the outcome of opinion polls, risk of further downside pressure. A What UK Thinks poll of polls is indicating that based on the latest average of six polls from 29 January to 16 February, the Remain campaign are ahead with 52% of the vote. However, Reuters is reporting that around one in five of the UK electorate are yet to make up their minds on which camp to support. This adds weight to the view that the outcome could go either way.
Even though PM Cameron does not have to call a vote on Brexit until 2017, there is pressure on him to call an early vote in order to draw a line under the uncertainty. Irrespective of its source political uncertainty is usually currency negative. Any indication that the UK was moving towards exit of the EU could thus trigger a further substantial drop in the value of sterling. This would not necessarily be an expression of the view that ‘Leave’ vote is a long term bad decision for the economy but rather doubt about implications of a change in the status quo.
Until the new political and economic landscape took shape it is likely that investments decisions would be postponed or directed elsewhere. This uncertainty could prevail for a couple of years and thus has negative implications for growth in this time frame irrespective of any changes in trading relations or regulations which could result from a Brexit. Although a weaker pound may increase the potential of imported inflation medium-term, added uncertainty about the outlook for growth and demand should underpin the likelihood that BoE policy is set to remain on hold at least until late 2016/early 2017. There are mixed implications for the longer end of the yield curve.
Over the coming months, opinion polls are likely to play an increasingly important part in guiding sterling. In turn the polls are likely to be influenced heavily by the messages reported by the press on the topic of Brexit. Earlier this month a YouGov/Times poll suggested that the Leave campaign was leading the Remain camp by 45% to 36%. YouGov reported that this vote was heavily impacted by negative headlines following the publication of the draft deal on EU Reform having discovered that after listing the contents of the draft deal support for the Leave camp fell to 41% vs. 38% for the Remain camp.
The spin of both campaigns will be critical in determining where swing voters eventually settle. Assuming the EU leaders accept the draft reforms at this week’s summit, PM Cameron is hoping to win the support of some high profile Eurosceptic UK MPs by the weekend. He is clearly expecting that this will give the Remain campaign a boost. Although there is scope for EUR/GBP to push a little lower on a successful end to the EU summit for Cameron, the pound is likely to remain vulnerable and volatility levels heightened.
Our forecast that EUR/GBP can return to the 0.70 area on a 12 mth month assumes there will be an early referendum and that the outcome will be a success for the Remain vote. On any other outcome, the outlook for sterling is far softer. On a Leave vote in any June referendum we would expect EUR/GBP to head back towards the 0.85 area initially.”
Key Quotes
“This means that the EU leaders summit that starts today in Brussels potentially marks the start of an intense period of campaigning by the UK’s ‘Leave’ and ‘Remain’ campaigns.
For sterling the next few months promise to be marked by volatility and, dependent on the outcome of opinion polls, risk of further downside pressure. A What UK Thinks poll of polls is indicating that based on the latest average of six polls from 29 January to 16 February, the Remain campaign are ahead with 52% of the vote. However, Reuters is reporting that around one in five of the UK electorate are yet to make up their minds on which camp to support. This adds weight to the view that the outcome could go either way.
Even though PM Cameron does not have to call a vote on Brexit until 2017, there is pressure on him to call an early vote in order to draw a line under the uncertainty. Irrespective of its source political uncertainty is usually currency negative. Any indication that the UK was moving towards exit of the EU could thus trigger a further substantial drop in the value of sterling. This would not necessarily be an expression of the view that ‘Leave’ vote is a long term bad decision for the economy but rather doubt about implications of a change in the status quo.
Until the new political and economic landscape took shape it is likely that investments decisions would be postponed or directed elsewhere. This uncertainty could prevail for a couple of years and thus has negative implications for growth in this time frame irrespective of any changes in trading relations or regulations which could result from a Brexit. Although a weaker pound may increase the potential of imported inflation medium-term, added uncertainty about the outlook for growth and demand should underpin the likelihood that BoE policy is set to remain on hold at least until late 2016/early 2017. There are mixed implications for the longer end of the yield curve.
Over the coming months, opinion polls are likely to play an increasingly important part in guiding sterling. In turn the polls are likely to be influenced heavily by the messages reported by the press on the topic of Brexit. Earlier this month a YouGov/Times poll suggested that the Leave campaign was leading the Remain camp by 45% to 36%. YouGov reported that this vote was heavily impacted by negative headlines following the publication of the draft deal on EU Reform having discovered that after listing the contents of the draft deal support for the Leave camp fell to 41% vs. 38% for the Remain camp.
The spin of both campaigns will be critical in determining where swing voters eventually settle. Assuming the EU leaders accept the draft reforms at this week’s summit, PM Cameron is hoping to win the support of some high profile Eurosceptic UK MPs by the weekend. He is clearly expecting that this will give the Remain campaign a boost. Although there is scope for EUR/GBP to push a little lower on a successful end to the EU summit for Cameron, the pound is likely to remain vulnerable and volatility levels heightened.
Our forecast that EUR/GBP can return to the 0.70 area on a 12 mth month assumes there will be an early referendum and that the outcome will be a success for the Remain vote. On any other outcome, the outlook for sterling is far softer. On a Leave vote in any June referendum we would expect EUR/GBP to head back towards the 0.85 area initially.”