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"The decision of the majority of the UK voters to Leave the EU changes in a fundamental way the outlook for Sterling and has economic implications which are sizable for the European economy, but less so for places like the US that are further away.
In this FX Views, we mark-to-market our forecast for the British Pound, where up until this point we had anticipated substantial appreciation against the Euro in coming years.
Our new forecast for EUR/GBP is 0.85, 0.82 and 0.78 in 3, 6 and 12 months (from 0.76, 0.74 and 0.70 before), reflecting a weaker outlook for Sterling over the coming year.
In the medium term, we think the Pound regains some strength, with EUR/GBP falling to 0.70 on a 24-month horizon (versus 0.65 in our previous forecasts) and then to 0.65 on a three-year horizon (unchanged from before). We are for now keeping our EUR/$ forecast unchanged, but as we argued in the run-up to the UK referendum, we believe the "leave" vote is a material negative shock to the Euro zone economy, which was struggling to reflate even before the recent turn of events. Our existing forecast of 1.12, 1.10 and 1.05 in 3, 6 and 12 months therefore has clear downside risk, once the near-term bid for the Euro as a result of risk aversion - for which there was clear evidence on Friday - abates. The risk is now that we reach our 24-month forecast of 0.95 and our 36-month forecast of 0.90 sooner, in particular if the doves on the ECB Governing Council shift once again to more proactive easing.
Our GBP/$ forecast, given our for now unchanged EUR/$ forecast, is therefore 1.32, 1.34 and 1.35 on a 3-, 6- and 12-month horizon, with our 24- and 36-month forecasts being 1.36 and 1.38, respectively".
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