Between July and September the pound underwent a major correction (-6,6%) against the dollar, going from almost 1,72 GBP/USD (high at 1,7192 - level abandoned in 2008) to 1,60 (low at 1,6052 .15 GBP/USD). Initially it was mostly a generalized appreciation of the dollar, helped by the testimony (July XNUMX) of Yellen, who had proposed the possibility of an early start of the Fed hikes in the event of improvements on the labor market faster than expected.
The second blow came in August, with the Inflation Report which, by lowering short-term inflation forecasts, extinguished speculation of an anticipation of the first Bank of England rate hike this year. These expectations had been forming in the light of continued upward surprises in GDP growth and the simultaneous decline, faster than expected, in the unemployment rate.
At the BoE meeting in early August, the first official rift had also arisen within the board, with 2 out of 9 members, Weale and McCafferty, voting for an immediate rate hike. However, the majority remains convinced of the advisability of a more cautious attitude. Indeed, in the RE, the BoE focused on the simultaneous decline in wage growth, a symptom of the presence of a still high degree of spare capacity in the labor market. According to the new forward guidance, in a context of lower inflation for longer, this calls for greater caution than in the past when raising rates. Expectations of an initial increase in the bank rate have therefore been postponed to the 1st-2nd quarter of next year. In our opinion, Q1 could already represent a reasonable option, barring disappointments on the growth/labour market front in the last months of 2014.
In a recent speech (9 September) the governor of the BoE, Mark Carney, stated that given the strength of the recovery underway, the time to start rate normalization is approaching and, as wage growth is expected to pick up around in mid-2015, the first increase in the bank rate could arrive by spring.
The pound was not able to benefit much from these developments, as it was penalized in the meantime by the increased uncertainty about the outcome of the Scottish independence referendum, due to be held on 18 September. On Sunday 7 September, a poll (conducted by YouGov Plc for the Sunday Times) showed for the first time the “yes” (pro-independence) side ahead of the “no” (anti-independence) side with a majority of 51 % against 49% (percentages calculated excluding the undecided). When the markets reopened on Monday, the pound had plunged to the 1,60 GBP/USD area compared to a low the previous Friday in the 1,62 GBP/USD area. Consider that just a month earlier (August 7) the same survey gave the "no" a clear advantage over the "yes" at 61% against 39% (a gap of 22% which reversed to -2%).
In a couple of days the pound then recovered to 1,62 GBP/USD helped by the last two surveys (Survation for the Daily Record on 10 September and YouGov again on 11 September) which instead still showed a prevalence of "no ”, respectively 53% against 47% (Survation) and 52% against 48% (YouGov). Even the latest survey published today by ICM for The Guardian confirmed the advantage of the "no" at 51% over the "yes" at 49%. However, until the day of the referendum, the pound remains exposed to high volatility, with a preponderance of risks towards the bass.
In fact, given that the share of undecided is high, the margin between yes and no is too small to be able to provide reliable indications on what will be the actual outcome of the referendum, the scope of which is anything but trivial. The consultation concerns the independence of Scotland from the United Kingdom. If the "yes" vote wins, Scotland would become a new sovereign state, with its own political-institutional and economic structure, including its own central bank, its own debt and its own currency. The project would take some time to implement and would be subject to complex negotiations between the UK and Scotland. In the face of high uncertainty about the results of such an operation, both ongoing and final, the only certainty as of now is that the costs to be paid to start it and carry it forward would be extremely high, right from the start.
It is therefore not easy to qualify and quantify in general the effect on the pound in the event of a victory of the "yes". It can be hypothesized that the immediate impact is an increase in volatility with risks of a further drop in the short term, plausibly below the GBP/USD 1,60 level, due to the uncertainty about the many unknowns that independence would entail.
Conversely, a victory for the "no" votes would maintain the status quo, with the double effect of facilitating at least a partial recovery of the pound, linked to the disappearance of the uncertainty factor, and of bringing the attention of the markets on "ordinary" developments in the British economy.
Our current exchange rate scenario is therefore based on the assumption that the referendum does not change the status quo. The expected recovery of the pound against the dollar, with a return towards 1,65-1,68-1,70 GBP/USD at 1m-3m-6m reflects the prospect that the consolidation of the domestic recovery will continue in the coming months, pushing the Bank of England to raise rates in the first quarter of 2015, in particular (shortly) before the Fed. The hypothesized decline to 12m instead reflects the prevalence, in market dynamics, of the turnaround expected towards mid-2015 on Fed rates, with an associated generalized strengthening of the dollar. Against the euro, this would imply the possibility for the pound to return to its recent highs (July: EUR/GBP 0,78 area) against the single currency and to inaugurate new ones, towards 0,76-0,74 EUR /GBP within the horizon at 3m-6m.
This would also take place as a function of a further expected depreciation of the euro against the dollar – especially after the ECB rate cut this month – with an extension of the drop below 1,30 EUR/USD towards 1,25 EUR/USD . In the direction of a greater strengthening of the pound against the euro, the most recent evidence would also lead the British currency to fall rapidly against the dollar, remaining instead almost unchanged (and in any case at strong levels between 0,80 and 0,79 EUR/GBP ) against euros. Furthermore, it is reasonable to think that when the Fed starts to raise rates, in the face of the generalized appreciation of the dollar expected, the pound will fall less than the euro because the Bank of England is also in the upward phase, whereas the ECB will diverge from both , especially if he had started a possible QE in the meantime.
