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Shock 2016 Exchange Rate Forcast Sees Pound to Dollar Rate at 1.25

The British pound is projected to be the weakest performing currency of 2016 by analysts at ABN Amro who have highlighted the substantial FX risks around the UK's referendum on European Union membership.

Exchange rate analysis Roy Teo

The latest set of currency projections offered by ABN Amro spell bad news for pound sterling bulls as they see a dramatically lower GBPUSD exchange rate thanks to uncertainty stemming from the European Union membership refrendum.

Analysts at the Dutch Bank say, “sterling will be the weakest performing major currency in 2016 in our view.”

Analyst Georgette Boele (pictured above) says fiscal consolidation, past sterling strength and the fear of a Brexit will weigh on UK growth and result in a later start of the BoE lift-off that currently is anticipated in financial markets.

The news that ‘fiscal consolidation’ will aid sterling under-performance is not a new one and echoes views we have heard elsewhere:

“Along with Japan, current IMF projections show the UK as among the biggest losers in the G10 space in terms of 2016 GDP outcomes from fiscal retrenchment," says Shahab Jalinoos at Credit Suisse who predicts a shave to near-term growth on the back of cuts.

There is of course the chance that both ABN Amro and Credit Suisse are wrong-footed following recent news that planned spending cuts would be dramatically lower than previously forecast.

The combination of stronger GDP growth and shallower cuts should put the British pound in good standing in our opinion.

Nevertheless, Boele says she has added short sterling versus US dollar to her high conviction list.

Latest Pound / US Dollar Exchange Rates

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1.3144▲ + 0.02%

12 Month Best:

1.4341

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1.2697 - 1.275

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“We expect that the UK government will hold a referendum on Brexit in the third quarter of 2016. It is unlikely that the BoE will hike before this referendum,” says Boele drawing on what will perhaps be the stand-out issue for GBP in coming months.

ABN Amro have pushed back their first rate hike prediction to November 2016 from August.

Financial markets still expect a one rate hike of 25bp and a 50% probability of another rate hike in 2016.

A strong recovery if Brexit is avoided

ABN’s main scenario is that Brexit will be avoided. Increasingly we are receiving evidence that suggests the UK populace is falling out of love with Europe at a rate that will terrify pro-EU activists.

Nevertheless, based on working assumptions that the status quo tends to prevail ABN Amro expect sterling to recovery strongly following this referendum outcome.

Focus will turn to the start of the BoE rate hike cycle should the UK vote to stay in the EU says Boele.

The pound to dollar exchange rate is forecast at 1.28 in mid-2016 which is well below consensus but could well price in GBPUSD should the UK vote to leave the Eurozone.

The consensus view by the worlds institutional researchers, according to Reuters polling data, is for the GBPUSD to be at 1.5234 by mid-year.

A low of 1.25 is forecast by ABN Amro for the third quarter ahead of a recovery to 1.27 by year end.

Consensus forecasts made by the world's leading institutional forecasters sees the exchange rate at 1.5089.

By contrast, “we remain positive on the US dollar across the board and we expect new highs in 2016,” say ABN Amro in a currency projection note to clients.

Compare this to HSBC’s view that the US dollar will be a laggard in 2016 as discussion to the number of US Fed rate hikes to be delivered over coming months is found to be dovish.

Compared to market expectations, ABN see less rate hikes for 2016 but more tightening in 2017.

“We expect a rally of sterling in 2017,” says Boele citing a rapid rate of interest rate increases by the Bank of England from late in 2016.

ABN Amro exchange rate forecasts

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