Pound Sterling Forecast 2016: Recommendations Against the Currency Grow

The British pound is facing a growing number of naysayers who predict the currency will decline over the course of 2016.

A good portion of anallysts, such as Carl Hasty, Director of Smart Currency Online, expect the threat of Brexit to weigh on the pound going into 2016:

“Concerns about the UK’s role in the European Union and the outcome of the Referendum vote likely to be in 2016 are casting a shadow over the currency and the outlook for the British economy.”

Fears of a Brexit will only have increased following the largest recent poll on the subject, conducted by Lord Ashcroft in the middle of December, which found that 47% of the 20,000 respondents questioned, wanted to leave Europe, versus only 38% who were in favour of staying – and 15% undecided.

If anything, the situation may have worsened since the poll, as it preceded David Cameron’s failed attempt to persuade fellow EU leaders to agree to a ban on benefits for immigrants for the first 4-years of their stay. 

Cameron's inability to exact reforms to Britain's membership are likely to increase the share of the 'out' vote. 

Fading Chances of BOE to follow Fed

Analysts are questioning whether the Bank of England will follow in the footsteps of the Fed and increase interest rates sometime soon.

Hasty, once again sees a rate hike in the early part of 2016 as now unlikely:

“Combined with the fading chances of the Bank of England following in the footsteps of the US Federal Reserve and raising interest rates, there has been a slump in sentiment for sterling.”

Société Génerale’s Kit Juckes is also increasingly sceptical about the chances of a BOE rate hike, given he sees U.K growth as having peaked at 3.0% in Q2 2014 compared to this year’s 2.1%.

“but even so, it looks as though the peak growth in the cycle is behind us and with the MPC pushing thoughts of rate hikes well into the second half of 2016, it’s by no means certain that rates will rise at all unless forced to by, say, a post-Brexit currency crisis.”

In a new year eve note, the analyst continued in the same bearish vein:

“Sterling's fading fast on a trade-weighted basis and hasn't been the top dog of the currency stakes since 1996,” and as far as the winners and loser for 2016, he saw the pound in:

“The bottom half of the table should see sterling, Australian and New Zealand dollars, the Euro and the Swiss franc all weaken, the last of these being the most vulnerable of all.”

Not all analysts, however, are expecting the BOE to delay.

UniCredit’s Lead UK Economist, Daniel Vernazza, for example, continues to see May as the most likely time for a preliminary hike, despite data showing wages slowed in November - stating in a note on the 16th December, that:

“At this point in time, we keep our forecast for the first BoE rate hike to come in May 2016, with the risks now skewed towards a later hike.”

His main reason for predicting this was a reduction of available slack on the labour market, which is eventually likely to translate into higher wages:

“The unemployment rate is now just 0.1pp above the BOE’s estimate of the long-term equilibrium rate – on any measure, slack in the labour market and the wider economy is close to zero. We expect the weakness in wage growth to be temporary.”

Pound’s turn to weaken according to long-term cycles

The currency team at Deutsche Bank see the pound falling to the dollar as the greenback continues its long-term 6-7 year grand upcycle:

“The multi-year strong USD cycle should extend for at least another 2 years, with a further 10% appreciation in the real broad USD TWI.”

Deutsche now sees it as probably sterling’s turn to weaken next:

“G10 currencies that have come through this relatively unscathed include the GBP and the CHF, that are both seen as overvalued by most longer-term (PPP, FEER, and BEER metrics).”

The note goes on to say that in 2016, it will be the turn of the pound to suffer, due to a combination of Brexit fears and fiscal contraction:

“In 2016, the GBP is likely to remain vulnerable most obviously against the USD. The pound in particular should suffer from a mix of fiscal contraction constraining the BOE tightening cycle, making a C/A deficit of near 5% of GDP more difficult to finance, most especially in the face of ‘Brexit’ uncertainties.”

As far as target levels, go the report sees cable falling to 1.35-1.40, “In 2016/7,” and the “bottom end of the range that has prevailed for 30 years.”

Technical Outlook

The pair is broadly consolidating in a long-term downtrend.

On the daily chart we can see a falling wedge pattern with the exchange rate currently tracking the lower border line down.

The pair has just broken below the S1 Monthly Pivot at 1.4866 but it remains inside the wedge pattern.

The pattern looks very mature and despite falling wedges normally being associated with break’s higher, with this one, there is a possibility of a breakout to the downside.

Such a move would be expected to reach 1.4650 where January’s S1 Monthly Pivot is roughly likely to be.

Alternatively, the pair could rise back up inside the wedge to upper border, but this would require a break above the likely level of the Monthly Pivot at 1.4945, and then the 1.5000 psychological plane.