Forecasts from 45 Leading Institutions Put Line-in-the-Sand at 1.40 for the GBP/USD Conversion

The British pound to dollar exchange rate (GBPUSD) could have reached its 2016 minimum suggests a poll of the forecasts held at the world's 45 largest institutions.

The latest Reuters poll of the world’s top 45 currency research institutions shows the pound to be trading above 1.40 between now and the EU referendum.

The news will be a welcome tonic in a time of heightened currency volatility and apprehension surrounding the vote.

Forecasts for decline of up to 20% against the dollar are the kind of forecasts that we tend to remember.

However the polling data from Reuters confirms that the probability of a Brexit remains below 50% amongst major currency researchers.

Therefore we should be assigning a 50%+ chance of an In vote to current projections.

At the time of writing the pound to dollar exchange rate is at 1.4163 just above the 1.40 mark it is forecast to trade around by the time of the June referendum.

Sterling has recovered against the US dollar through March having hit mult-year lows at 1.38. Markets clearly thought the move lower had been a case of 'too fast too soon' and the stabilisation above 1.40 suggests markets agree with the analyst community that all things equal levels just north of 1.40 hold the correct amount of Brexit premium.

That said, the pound is trading well below where it should.

Using a popular foreign exchange forecasting tool known as the 'unvovered interest rate parity condition' UniCredit suggest sterling should be above 1.50 were there no Brexit premium written into the exchange rate.

It goes without saying though that should odds of a UK exit from the EU increase the markets will likely push the pound lower and we will receive updated forecasts from the research houses.

The pound to dollar exchange rate is forecast to trade around 1.40 in a month's time and still be there in three months, just before the vote.

A year from now the GBP/USD is forecast to recovery to 1.46, en-route to the levels above 1.50 area mentioned.

Pollsters at Reuters confirm that these forecasts are all a cent or two weaker than predicted a month ago.

Latest Pound / US Dollar Exchange Rates

	Live: 1.3336▲ + 0.07% 12 Month Best: 1.3789
*Your Bank's Retail Rate	1.2882 - 1.2936
**Independent Specialist	1.3149 - 1.3203 Find out why this is a better rate

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

More Downgrades to the Forecasts Possible

Make no mistake though, the risks to the forecasts remain poised to the downside, particularly in the wake of March’s PMI data releases.

The data came in well below expectations confirming the UK economy was stuttering as Brexit-inspired uncertainty made itself felt in the real economy.

The most notable impact of the data has been to increase talk about the potential for more voters on the Bank of England’s Monetary Policy Committee to start voting for interest rate cuts.

“With the services PMI historically having some predictive power in trailing changes in MPC policy sentiment, today’s report points to an increasing likelihood that some on the MPC – most likely Andy Haldane and Jan Vlieghe – may soon be tempted to vote for a cut in Bank Rate,” say Lloyds Bank in a foreign exchange note to clients.

Data will need to hold up over coming months to shift attention away from intrest rate cuts.

It can't be emphasised how negative a cut, or increased quantitative easing, would be for sterling.

GBP/USD Advances Beyond 1.42

The British pound has made an impressive recovery through the course of February and closed the week by recording its 6th consecutive days of gains against the US dollar.

It was all about the dollar on Friday as the monthly employment numbers were released and markets were looking for evidence that the Federal Reserve would pursue higher interest rates in 2016.

US non-farm payrolls data read at 242K, well ahead of the 190K forecast by analysts, and the US dollar made a strong ascent..

However, markets soon lost enthusiasm having observed Average Hourly earnings declined by 0.1%. Analysts had expected the number to rise.

Indeed, we saw the dollar lose ground when last month's reading of 151K was overshadowed by softer earnings numbers.

Most analysts agree that the Fed may hestitate to raise rates with such soft underlying data, robbing the USD of the rate advantage support it needs to advance further.