The GBP/USD has dropped below $1.41 after bearish data about the U.K. trade deficit. The GBP/USD, or the “cable” as currency enthusiasts call it, was going for a rally on Thursday. Still, the trend promptly reversed and given the prevailing market sentiment, it remains negative. The British pound to USD pairing finds support for the pound sterling at the $1.40 threshold, which acts as barrier against further weakness.
Investors should watch the British pound at $1.40. If the cable falls below that number, the pound bears will find fertile ground for additional drops. A slide below that level would be extremely negative for the British pound. If the pound manages to stay at even slightly above $1.40, it would send a bullish hint for currency investors to buy the British currency.
Yet the bullish scenario faces heavy resistance from an increasingly anxious British market. Much of the uncertainty concerns the United Kingdom’s future within the European Union and the prospect of Britain abandoning the Union in a so-called “Brexit” after the referendum to be held on June 23. British pound trading in the short term will be frantic and characterized by a narrow range.
Meanwhile, the British political situation could heat up. British Prime Minister David Cameron is under pressure and scrutiny from his involvement in unreported investment gains revealed by the so-called Panama Papers. The files accuse him of having failed to report assets from his ties to his father’s investment fund, which eluded British tax authorities for years. Cameron’s admission has not taken the heat of legal and media scrutiny away.
Other important figures in his party could be involved in the scandal. The more directly implicated prime minister of Iceland, David Gunnlaugsson, resigned just two days after news of the allegations first broke.
The Panama Papers and Cameron’s involvement have raised the risk of a Brexit. Cameron has come under increasing pressure to the point he might lose confidence from the House of Commons. This would force him to resign. The government would lose its main pro-EU voice, leaving the U.K. more susceptible to the prospect of a Brexit.
The GBP will be the main victim of a Brexit scenario and the governor of the Bank of England, Mark Carney, has warned the British financial establishment that the U.K.’s potential exit from the European Union represents the biggest internal threat to Britain’s financial stability. (Source: “Mark Carney Says Brexit Is Biggest Domestic Risk to U.K. Financial Stability,” The Wall Street Journal, March 8, 2016.)
A recent Reuters poll has estimated just how much the GBP would suffer in the case of a Brexit. According to the poll, if Britons vote to retain their European Union membership on June 23, then the pound sterling would gain four percent on the dollar in the immediate aftermath of the referendum. (Source: “If Britons vote to stay in EU sterling would gain 4% soon after,” The Star, April 8, 2016.) That means the GBP/USD would head straight to $1.46–$1.47, given the current trading band.
However, the same poll also predicts that if Britain decides to divorce from the EU, the British currency would fall seven percent. (Source: Ibid.) That means the GBP/USD would collapse to $1.31 or even $1.30. The pound sterling has already touched its weakest point in almost two and a half years against the dollar and other currencies.
While the polls show that those in favor of remaining in the EU would win over those who want to abandon it, there is still a 35% risk of a Brexit. (Source: Ibid.) This leaves investors wary as concern over the outcome of the vote builds. Prime Minister Cameron’s Panama Papers woes only add to the uncertainty.
The prospect for the GBP/USD is bearish and unpredictable. Given the dollar and the euro’s own weaknesses, due to central bankers’ reluctance to raise interest rates, the Swiss franc (CHF) and Japanese yen (JPY) are the haven currencies of choice in the short or medium term.