The pound to dollar (GBP/USD) exchange rate is racing lower with 2015 starting off with a decisive break lower.
And, according to a fresh forecast on the pair, more losses are likely over the course of the following 12 months.
The pound to dollar is seen trading at 1.5149 at the time of writing; GBP/USD commenced 2015 just below the support zone of 1.56 representing a substantial leg in the move lower.
Forecasting Further Falls in 2015 Thanks to Politics
The end of the decline in sterling / dollar is not over says analyst Ian Stannard at Morgan Stanley in London.
Stanndard tells us that one of the key reasons for the predicted under-performance in the GBP in coming months is the rise of political uncertainty in the United Kingdom.
We saw how the Scottish referendum hit sterling in September 2014 - expect more of the same in this election year.
“GBP declined sharply at the beginning of the year as the focus switches to politics, not just in the UK but more broadly in Europe, where a eurosceptic political environment appears to be developing.
“Indeed, the failure of the Greek parliament to elect a new president at the end of last year, triggering a general election for January 25, has brought European political risks sharply into focus.
“While this has put EUR under pressure, it is interesting that GBP has not acted as a safe haven, but instead GBP suffered as a result, as attention on the UK political landscape and the May 7 election intensifies.”
An interesting graphic representation is provided by Morgan Stanley. In the below image we see the GBP/USD is intent on tracking the euro dollar lower.
With the outlook for the euro looking soft at best we would then expect similar underperformance by sterling.
Points Underscoring British Pound Weakness in 2015
- While the policies currently being presented by the major parties are unlikely to be attractive to foreign investors (EU referendum from the Conservatives and Mansion tax from Labour, with both also promising further fiscal tightening), we believe that it is likely to be the uncertainty that keeps GBP under sustained pressure over the coming months.
- The changing composition of the political landscape in the UK is set to make the May 7 general election even harder to predict than usual.
- Smaller parties are reducing the share of the vote of the traditional parties, with opinion polls currently pointing to no party having an overall majority.
- This increases the likelihood of another hung parliament in the UK, requiring a coalition of parties to form a government (our base case is for a government led by one of the traditional parties). The increased uncertainty has the potential to deter investor inflows, undermining support for GBP.
- Using cross-border M&A activity as a proxy for broader FDI flows suggests that business investment to the UK started to slow in 4Q14. On a 12-month cumulative basis, net M&A inflows to the UK are at the lowest levels since the beginning of 2011.
- Overseas investor purchases of UK gilts have fallen and even turned negative, with net selling seen in August and September.
- Slowing investment inflows suggest that the UK will become more reliant on short-term flows to fund the deficit, suggesting increased GBP volatility.
Forecasting GBP/USD at 1.40 and Lower
All this feeds into a markedly lower sterling dollar profile in the year ahead.
Exchange rate forecasts from Morgan Stanley pencil in a test of 1.40 and even 1.35.
USD Fails to Get Lift from January Payrolls Report
Arguably the biggest data event for the USD of the month has passed, and it has not afforded the USD a fresh lift.
Nonfarm payrolls rose by 252k (consensus 240k) and there were upward net revisions to previous data of 50k.
Private payrolls increased by 240k and government payrolls were up by 12k.
The unemployment rate declined to 5.6% (5.565% rounded to three decimals), following a modest 111k rise in the level of employment in the household survey and a two-tenths decline in participation rate to 62.7%.
However, the disappointment for the US currency came in average hourly earnings, which fell 0.2% on the month and are up only 1.7% y/y.
"We continue to forecast the first policy rate hike from the Fed in June of next year, with risks skewed in the direction of a later take-off," say Barclays.