EUR/GBP Fundamental Forecast – February 1, 2016

The EUR/GBP added 20 points to 0.7638 as the pound tumbled as traders begin to deal with Brexit. Political uncertainty surrounding the EU referendum will intensify ahead of a possible vote in late June. Although the most likely outcome is a vote to stay in, Sterling's position is likely to get worse before it gets better. Political doubts will tend to compound capital outflows and leave the UK currency vulnerable to sustained selling pressure during the first half of 2016.
The UK government has demanded reform measures on economic governance, competitiveness, immigration and sovereignty. Assuming a deal can be reached, Cameron will then campaign for the UK to stay in the EU. The UK government is hoping to reach a deal on revised EU membership terms at the February 18/19 summit and there is strong evidence that Prime Minister Cameron will look to hold a referendum on whether to stay in the EU in late June.
The German government wants the UK to stay in the EU and the British negotiating position may now look stronger given Chancellor Merkel's domestic difficulties. Her vulnerability will certainly increase pressure for a deal, but there are still major barriers to more than cosmetic concessions.
Euro-area inflation accelerated in January, providing a reprieve for European Central Bank officials that may prove temporary as commodity prices continue their descent and emerging markets slow.
Consumer prices rose an annual 0.4 percent, after 0.2 percent last month, the European Union’s statistics office said on Friday. That matches the median estimate in a Bloomberg survey of economists and is the biggest increase since October 2014.
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