GBP appreciated strongly this year despite softer growth and delayed BoE lift-off

GBP was a default beneficiary of external weakness and QE, helped by a general election result that (temporarily) lifted political risk. 2016 should be more nuanced, albeit still net positive for GBP. Diminishing FX impact is expected from overseas QE, which places greater emphasis on the BoE finally delivering to sustain GBP's uptrend. The BoE's sensitivity to FX pass-through should limit further gains even if the MPC does get going in May. 

Politics looms large again in the form of the EU referendum. The economic consequences of Brexit are potentially profound, albeit highly uncertain, and the vote should command a risk premium in spot, more so in vols and correlations. Brexit odds are 20%, perhaps 30%. Benchmarking the FX impact of a vote to leave is little more than guesswork. A 5% hit is expected to the GBP index near term, extending to 10% if reserve managers sell and expose fragile current account fundamentals.  

A Brexit risk premium is starting to be priced into options. This will intensify once a date is set. The timing of the vote will determine the precise contours of GBP in 2016. For illustration a Q3 vote and a 2% pre-referendum dip in GBP is expected in 2Q (cable to 1.47, EUR/GBP to 0.70/71). Cable is expected to end 2016 at 1.57, EUR/GBP at 0.72 assuming a vote to remain and EUR/USD recovering to 1.13. Brexit would take cable to the low 1.40s, EUR/GBP to the mid 0.70s. A vote to remain accompanied with accelerated rate hikes would take cable to 1.62-1.63 and EUR/GBP to 0.66-0.67.