Could Pound Sterling US Dollar Forecast Plunge to Parity on Brexit Vote?

June 17, 2016 - Written by Toni Johnson

STORY LINK Could Pound Sterling US Dollar Forecast Plunge to Parity on Brexit Vote?

Bank of England (BoE) Warn of the Risks Attached to Brexit

The Bank of England (BoE), ostensibly an independent organisation, weighed in to the European Union Membership Referendum debate yesterday afternoon. The minutes of this month’s BoE monetary policy meeting issued a stark warning to British voters ahead of next Thursday’s plebiscite. The Old Lady of Threadneedle Street’s missive noted that,

‘while consumer spending has been solid, there is growing evidence that uncertainty about the referendum is leading to delays to major economic decisions that are costly to reverse, including commercial and residential real estate transactions, car purchases, and business investment. As the Committee has previously noted, potential referendum effects are making economic data releases more difficult to interpret, and the Committee is being more cautious in drawing inferences from them than would normally be the case.’

EU Referendum Uncertainty Weighs on BoE Rate Hike Bets

The Pound Sterling (currency : GBP) gave up significant ground against nearly all of the other sixteen most actively-traded global currencies in the aftermath of the Bank’s commentary. The BoE’s dire warnings of the effects of a potential Brexit were one factor weighing on Sterling throughout yesterday’s session, but another longer term drag are UK interest rate expectations. The Bank issued a downbeat message on this front, observing that,

‘twelve-month CPI inflation was 0.3% in May and remains well below the 2% inflation target. This shortfall is due predominantly to unusually large drags from energy and food prices, which are expected to attenuate over the next year. Core inflation also remains subdued.’

Futures markets now forecast that the next BoE interest rate hike will not come until the year 2020. If this proves to be correct, then support for the Pound will be heavily subdued for years to come even if UK voters opt to ‘Remain’ in the European Union next week. The outlook for Sterling is now therefore decidedly mixed, with some analysts suggesting that the Pound US Dollar exchange rate could plunge to parity.

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TAGS: American Dollar Forecasts Pound Dollar Forecasts Pound Sterling Forecasts