Pound Sterling (GBP) Exchange Rate Forecast Update: Boris Johnson Brexit Campaign Announcement Pummels Sterling

Modified: Thursday, 25 February 2016 13:01 BST - Written by David Woodsmith

STORY LINK Pound Sterling (GBP) Exchange Rate Forecast Update: Boris Johnson Brexit Campaign Announcement Pummels Sterling

Pound Sterling Exchange Rates Slumped Yesterday following Johnson Comments

The world’s leading credit ratings agencies suffered significant reputational damage in the aftermath of the 2007 – 09 global financial crisis following their abject failure to warn investors of the true quality of the ‘diced and sliced’ mortgage-backed debt notes which triggered the credit crunch. Notwithstanding this monumental oversight, market participants still sit up and take note of what the leading agencies such as Standard & Poors, Moody’s and Fitch have to say.

The Pound’s dire performance yesterday was driven partly by maverick Conservative MP and Mayor of London Boris Johnson’s Sunday afternoon declaration of support for the campaign for the UK to leave the European Union; however, leading credit ratings agency Moody’s added to the downside for the Pound, which posted its worst daily performance for almost six years yesterday.

Moody’s described the In / Out referendum on the UK’s continued membership of the European Union, which will take place on 23rd June, as, ‘too close to call’.

Analysts at Moody’s went on to explain that they, ‘consider it positive that the referendum will take place as soon as June, as a lengthy period of uncertainty on the part of firms and investors would damage the UK’s economic growth prospects. That said, the outcome of the referendum remains wide open. In our view, a decision to leave the EU would be credit negative for the UK economy.’

Futures Markets Pricing in 68% Chance that UK will Remain in the EU

At the time of writing, futures markets are pricing-in an implied percentage chance of 68% that the UK’s voters will opt to remain in the European Union on 23rd June, although with four months to go there is plenty of time for those estimates to fluctuate, particularly considering the large portion of undecided voters.

If analysts at investment bank Citi are correct, then Sunday’s announcement by Boris Johnson has significantly increased the likelihood of a vote to ‘leave’ the EU. They upped their forecast of the chances of a Brexit from 20-30% before the weekend to 30-40% yesterday, noting that, ‘so far, polls still suggest that the UK is more likely to vote to stay in the EU than to leave, and indeed ‘remain’ is still our base case scenario. We expect the campaign between now and June to shift the debate from the nature of the UK’s relationship with the EU to the economic and political risks of Brexit.’

If Citi is correct and the UK electorate do indeed vote to ‘remain’, then the forecast for the Pound Sterling will improve dramatically from 24th June.

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TAGS: Pound Sterling Forecasts