While most are anticipating the GBP to EUR exchange rate to rally sharply in the event of a Remain victory being announced on June the 24th we have seen research that suggests any rally should ultimately be unsustainable.
- The pound to euro exchange rate today trades lower at 1.2589
- The euro to pound sterling exchange rate is today at 0.7947
The British pound is under notable selling pressure on Tuesday the 14th June with analysts attributing the weakness to the desire amongst investors to steer clear of the UK currency ahead of the June 23rd vote on UK membership of the European Union.
There appears to have been a sudden switch in market sentiment this June with investors waking up to the fact that they have been to complacent in 'pricing in' the event of a UK exit.
"Yet another day in the red for European markets has seen fears surrounding a potential Brexit continue to restrain risk appetite," says Joshua Mahony at IG. "The flight to safety is clearly evident in FX markets, with money moving out of European currencies and into distant havens such as the yen and dollar."
Yet another EU referendum poll has hammered home the increasing threat of a Brexit next week, with the TNS poll coming out heavily in favour of the UK leaving the EU today.
TNS have found that 40% of the respondents to their most recent survey would vote to Remain, 47% to Leave and 13% are still undecided.
"What initially looked like an anomaly, has turned into the norm, with 8 of the last 10 polls coming out in favour of a Brexit," says Mahony.
Sterling to Remain Under Pressure, Whatever the Outcome of the EU Vote
Odds markets are also moving in favour of a Brexit, but, importantly, they remain comfortably on the side of Remain.
Indeed, most analysts are in agreement that Remain should win the day and the focus of analysis has thus been on the pound's subsequent rally.
A rally that could disappoint argue Societe Generale.
Societe Generale have released their forecasts for the second half of 2016 and it shows sterling will endure an unhappy christmas.
“Less than two weeks before the referendum on UK membership of the EU leaves us even
more hostage to fortune than usual, but we expect to see sterling lower by the end of 2016, regardless of the outcome," says Societe Generale's Kit Juckes.
Soc Gen base their call on the observation that the UK economy was losing momentum before the referendum was announced and is still doing so.
"We do not expect the MPC to be able to raise interest rates in the current cycle at all – a long period of neutral policy seems assured. That’s good for gilts, not so much for the pound,” says Juckes.
Forecasting a Weaker British Pound
Societe Generale’s have lowered their year-end forecast for the EUR/USD, this is seen offering some support for the EUR/GBP pair.
However, this shifts the focus of sterling weakness into the GBP/USD:
“This pair has tracked relative interest rates more closely than any other G10 currency pair in recent years and, if anything, has lagged the move in rates during the last couple of months as sterling has benefited from a short-covering rally in the run-up to the EU vote," says Juckes.
Soc Gen have extrapolated the correlation between GBP/USD and yields of the last few years, based on SG forecasts for 2-year interest rate differentials (widening from 17bp currently to over 50bp by year-end and 90bp in mid-2016), the GBP/USD could be below 1.35 by year-end and closer to 1.25 by mid-2017.
“Those numbers are well below our forecasts, but do encourage us in our belief there is more sterling weakness to come, even if we do see a post-referendum bounce first," says Juckes.
Soc Gen say their core strategy will be to sell GBP against the EUR and USD on any post-referendum bounce, assuming we see a ‘remain’ outcome that takes the EUR/USD and GBP/USD higher.
“On an exit, both the GBP/USD and EUR/USD are likely to fall, and keep on falling. On a UK ‘Exit’ we are likely to see GBP/USD test 1.25 this year, and indeed, the EUR/USD could fall sharply too (to 1.05?). That would take EUR/GBP towards 0.85,” says Juckes.