Investors are piling into the US dollar and are likely to continue to do so for the next two and a half months, according to deVere Group.
This is despite the Federal Reserve’s recent dovish tone, which saw the USD lose ground against the pound (GBP), says James Stanton, head of foreign exchange (FX) at the independent financial advisory organisation.
“The rally in sterling in March reflects the dovish remarks from Fed chair Janet Yellen at the last Federal Open Market Committee (FOMC) meeting, commented Stanton.
“The Fed, and FX traders, reduced their expectations of further rate hikes this year to just two – and for these to be highly dependent on ongoing strong economic data. This helped pull the dollar back against most major currencies, including sterling.
“This situation, combined with the uncertainty surrounding the possibility of the UK leaving the EU, is driving investors to pile into the greenback. They are certainly not resting on their laurels as far as sterling is concerned.
“A run on the pound is possible if Brexit appears likely. Driven by the uncertainty of economic policy, and trade relations with the EU in what will be a new political environment.
“Furthermore, yesterday’s announcement of a post-war record [UK] current account deficit, at 5.2 per cent of gross domestic product [GDP], suggests a worrying dependence on foreigners’ enthusiasm for lending the UK money.
“Should this enthusiasm falter, post-Brexit, either the currency will sink or the Bank of England [BoE] will have to raise interest rates to protect sterling. Sterling might survive, but higher interest rates risk inducing a recession.
“Therefore, investors are using the recent strength of sterling against the dollar as a major dollar-buying opportunity, in the event of Brexit. It can be expected that this will continue until the in/out referendum to decide Britain’s place within the EU.”
Stanton concludes: “Sterling will be highly sensitive to the risk of Brexit over the coming months. But this need not be all bad news for the currency: a vote in favour of remaining in the EU could see sterling to jump to the $1.50 level.”
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