GBP to USD: This Could Lead to a Collapse of the British Pound

GBP to USDBad News for the British Pound

The bears attacked the British pound on Tuesday like a “Bear” on Leonardo DiCaprio, hungry for the actor’s long-awaited Oscar. The GBP to USD exchange rate dropped more than a full percentage point against the dollar and the euro.

The financial sector reacted predictably to the latest terrorist attacks in Europe. This time, the target was Brussels, where presumed Islamic State-inspired attackers set off bombs at the European capital’s airport and subway system.

The prospect of a related rise in hostility among public opinion regarding immigrants and refugees could swing voters in favor of a “Brexit” in the United Kingdom in the coming referendum on June 23 to determine whether the U.K. leaves the European Union. The closer the outcome weighs in favor of a Brexit, the more the GBP/USD rate moves in favor of the dollar.

Therefore, the increased chances of a Brexit prompted an almost automatic reaction, as investors sold British pounds. On Tuesday afternoon, the GBP/USD pair dropped by a whole percentage point to US$1.422; it was trading above US$1.435 on Monday. The GBP also lost to the euro, itself under bearish pressure going from 1.2671 euro from around 1.2800 on Monday.

Despite, better-than-expected industrial and manufacturing results from earlier in March, the sterling pound remains susceptible to the prospect of a Brexit, which many predict would hurt the U.K. economy.

The lowest point in recent weeks was, in fact, US$1.39 on February 21; not surprisingly, this was as London’s colorful mayor, Boris Johnson, punted in favor of the Brexit. (Source: “British pound plummets after London’s mayor backs Brexit,” The Washington Post, February 22, 2016.)

Adding fuel to the Brexit fire, an editorialist from The London Telegraph, Allison Pearson, hinted at the mood in London as next June’s Brexit referendum approaches: “Brussels, de facto capital of the EU, is also the jihadist capital of Europe. And the Remainers dare to say we’re safer in the EU!” #Brexit. (Source: Allison Pearson’s Twitter.)

Allison Pearson was merely one of the first to use the Brussels attacks as a battleground between those favoring the Brexit and those against it (the so-called Remainers). This is a hot topic in the U.K. and across Europe.  The Party for the Independence of the United Kingdom, UKIP, blamed the attacks on the freedom of movement within the EU, stressing that this represents a threat to the security of Britain. (Source: “Brussels explosions: Ukip says terror attacks show EU freedom of movement is a ‘security threat’,” The Independent, March 22, 2016.)

The GBP will be the main victim of a Brexit scenario. Indeed, the governor of the Bank of England, Mark Carney, has warned the British financial establishment that the U.K.’s potential exit from the 28-country European Union after the June referendum is 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 Brexit would also prompt many big banks to leave London. The U.K. would simply cease its role as global financial superpower. Carney stressed that his was not a political stance; merely, he was offering a technical opinion over the fate of the world’s fifth-largest economy.

Uncertainty is a new sensation for Britain. Over the past five years, many considered the U.K. an island of stability at the edge and the eurozone in the eye of the storm—many storms, actually. After the dark days of 2008 to 2009, in which the government had to nationalize some banks, the economy is now restarting.

Unemployment has fallen and the London property market has reheated after the post-financial crisis slump. By all accounts, London has become a safe haven for international capital. The pound had started to rise again, thanks to the expectation that the Bank of England would raise interest rates from its near-zero levels established after the 2008–2009 crisis.