Series of hindrances to hamper GBP in H1 2016 – capital outflows, CAD, Brexit pressures among major headwinds

In H1 2016, considerable odds on the UK to leave the EU is a concrete risk that will progressively grab market concentration.

But uncertainty and expectation should keep on elevated until the referendum and the outcome is too close to call.  A recent poll shows that the "out" camp is still making all the running.

The pledges are sizeable because Brexit would have damaging consequences for UK growth and would also sturdily harm the European economy via the trade and financial transmission channels.

We could still foresee this as an equal probability of Brexit or on hold.

Apart from this, a stern damage to UK growth prospects would severely hurt sterling.

Capital outflows accelerated by a dismal investment outlook would worsen the UK's external position (the current account deficit has reached a record high of 5.1% of GDP) and fuel a negative GBP spiral, as the economy relies on capital inflows.

The BoE would respond by staying accommodative for a longer time, which would weigh more on the currency.

GBP/USD would show more currency depreciation than the EUR/GBP's appreciation in a Brexit scenario. However, this does not imply that the optimal hedging solution is expressed in cable.

Ruthless downgrading UK growth projections would severely hamper sterling.