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The big news today is that David Cameron will propose a referendum on whether or not the UK stats in the EU.From SocGen’s Kit Juckes, here’s what that means for the UK pound. Basically it’s just part of a perfect storm that includes a potential loss of the AAA and weakening economy, meaning pound pounding may be in store:
One man who may find it easy to talk down his currency is David Cameron. The pound is already under pressure. Promising a referendum on EU membership can send it lower. Cameron will deliver his delayed speech on the UK’s relationship with Europe this morning, and press comments suggest he is going to promise a referendum on EU membership in the next parliament, should the Conservatives be in power at that point. I don’t believe Mr cameron wants the UK to leave the EU, but he does want to change the relationship with the Euro Zone countries as they move towards closer ties in the wake of the crisis of recent years. The risk, obviously, is that a promise of a referendum will see firstly, little enthusiasm from the UK’s European partners to re-negotiate the terms of membership, and secondly, growing concern abut what economic isolation could do for the UK. A vote won’t happen until 2017, if at all, but the pound can react much quicker than that and this is another potential drag. A weak economy, a triple-A credit rating in danger of downgrade, export volumes which are lower than they were in 2008, and a more central bank than the ECB, is not a recipe for a strong pound. Today’s labour market data will need to avoid disappointing if we are to avoid another rapid spike higher in EUR/GBP to 0.85 and beyond.