© Ross Walker
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I think that depends mainly on the results of the referendum. If the UK votes to remain in, then we would expect much less impact in terms of the economy. We might even see some slight pickup in confidence through the last part of the year. Of course, if the UK votes the other way, then that would bring potentially significant changes. A lot of uncertainty in the near term over single market access that would of course be in that scenario a post-exit negotiation process, which would last two years. It might not be the end at that point, as number of issues had not been concluded. The uncertainty could be quite challenging, and that is a big risk for financial services businesses, because the existing arrangements mean that overseas non EU banks based in the UK today can access the single European market by virtue of being based in London. If that passporting arrangement collapses, then that could potentially have a significant impact on the financial services sector in the UK. However, much will depend on a political negotiation in the event of an exit vote and that would be very hard to call, because it would be a political process.
What other factors will influence the performance of the Pound this year? And what are your forecasts for GBP/USD and EUR/GBP for the Q3 of 2016 and in a longer term?
In the near term, the Brexit issue has clearly been the dominant theme. Of course we also have growing uncertainty bias on US Federal Reserve monetary policy. It is not that long ago, but the Fed had been expected to raise rates for 100 basis points or so. I think the near term-position is that the Fed view is going to really drive the Sterling over the next few weeks, may be the next month. As we get closer to the referendum, I think the UK will become more decisive. We are going through a quiet phase at the moment on the referendum side of things. However, that will change as we are moving into May and June. In the near term we see further downside risks for the GBP/USD and we could easily test 1.40. I believe, if an exit vote gets likely, there would be significant downside pressure. I suppose we could go below 1.40, possibly to mid-1.30 against the Dollar. However, much will depend on how the Fed policy evolves in first instance, and then the markets will be following the opinion polls.
Talking about the EUR/GBP, the situation is more difficult, as the Sterling has been under pressure. Generally, it still looks relatively elevated against the Euro. I believe there are obvious downside risks, since the ECB of course is engaging in monetary policy loosening, and we do not expect that from the BoE. But at some point the heightening risks of Brexit I believe would carry risks for the part of the EU, particularly the Euro area periphery. Thus, at that point market sentiment towards the Euro might sorrow a little. On balance I think we would probably see the EUR/GBP continuing to rise to 81-82 levels as a central pace. However, at some point if Brexit looks more likely, then the confidence in the Euro area is going to be tested again.