GBP/USD Monthly Fundamental Forecast – March 2016

The GBP/USD took a big header as David Cameron announced a deal with the EU and called for the June 23^rd reference. GBP dropped to 1.3834, a 7-year low amid rising concerns about Brexit, as the latest polls showed 52% voters supporting Brexit while 48% would like to stay in the EU.

With the Brexit referendum set for June 23^rd that will be the only controlling factor for the pound this month and for next. The immigration/refugee challenge may reach existential proportions. In some ways, it is more fundamental than Greece, which preoccupied investors at the start of 2015. As we have seen in the debt crisis, EU officials are pushing for new collective powers that erode national sovereignty. The goal is enhanced ability to protect the external borders, even over the objection of national officials. The politically salient agenda of immigration, terrorism, high levels of unemployment, economic insecurity, and sovereignty, plays into the hands of demagogues. It is not clear when the UK will hold a referendum on its membership in the European Union.

If the UK does opt to exit, we would expect sterling and UK assets, in general, to be marked down, and potentially sharply (depending on what had been discounted). However, we expect a cost-benefit analysis to ultimately carry the day, and for the UK to remain in the EU. The Bank of England (BOE) is widely perceived to be the second of the G7 central banks to hike rates after the Fed. A hike in lateH2 seems a reasonable time frame as 2015 comes to a close. However, wage growth, one of the few arguments favoring a hike, has already lost the upward momentum, and there are other signs that the UK economy may be slowing. The risk seems to hint towards a later rather than a sooner BOE lift-off.

FxEmpire provides in-depth analysis for each currency and commodity we review. Fundamental analysis is provided in three components. We provide a detailed monthly analysis and forecast at the beginning of each month. Then we provide more recent analysis and information in our weekly reports and we provide daily updates and outlooks.

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March 1, 2016