More Downside for the British Pound?
The British pound continues to succumb to pressure from the prospect of Britain leaving the European Union. This potential “Brexit” is not just a possibility, it’s a probability and the GBP to USD exchange rate reflects this. The currency has virtually plummeted to the lowest level in the past three weeks after two polls have showed that there has been a sharp rise in pro-Brexit sentiment.
The June 23 referendum is now a little more than two weeks away and far from a mere distraction on a slow news day. It threatens to throw the global markets into chaos if England decides to leave the European Union (EU). The British pound has weakened against all 10 major currencies in the developed markets after two surveys that have shown that today, the majority of voters are willing to vote to leave the EU than vote to stay.
Today, the GBP to USD exchange rate has dropped to just less than $1.44.
Janet Yellen, the U.S. Federal Reserve chair, delivered a favorable speech about the state of the U.S. economy. Its timing and content all but confirmed the possibility of one or more interest rate hikes this year. Given the uncertainty that will continue until June 23 confirms which direction England and the United Kingdom (U.K.) will go, the GBP/USD currency pair, called the “cable,” will continue to attract speculative interest.
Certainly, until the polls start showing a distinct and strong reversal in Britons’ opinions toward the EU, the GBP will be under pressure. In other words, the cable might overcome its $1.43 support base and fall back to $1.34 (its recent low record) or lower. Indeed, the favorable comments on the U.S. economy from Yellen will eventually prompt a rate hike to regulate inflation—regardless of how the British people feel about EU membership. Yellen has kept quiet on the Fed’s interest rate hike timing, but there is no doubt a hike is coming within the next six months.
The latest polls are not British pound–friendly. A YouGov poll for television network ITV showed that 45% of Britons want out of the EU, while only 41% want to remain (or “Bremain,” as it’s being called). (Source: “YouGov Brexit poll for ITV shows ‘Leave’ leading ‘Remain’: Bloomberg,” Reuters, June 5, 2016.)
A separate survey by TNS, a market research company, suggests that 43% of Britons will vote for a Brexit and 41% will vote to Bremain. (Source: “Britain’s EU Out campaign takes 4-5 percentage point lead: YouGov and ICM polls,” Reuters, June 5, 2016.)
The British pound—and the GBP to USD exchange rate for that matter—is a key barometer in the referendum debate and has actually dropped to the lowest level of the past seven years (1.3836 against the greenback) last February. It rallied in April amid optimistic British economic data and the results of early Brexit polls, which pointed toward a victory for the pro-EU crowd.
The Brexit referendum also affects the EUR to USD exchange rate. The European Union and, by extension, the euro currency would suffer in a Brexit scenario. Should this happen, all EU countries will have to renegotiate their relations with the Union. The euro has already slipped 0.2% to 1.1342 against the U.S. dollar. (Source: “GBP/EUR, GBP/USD Exchange Rates Plummet Today, Polls Suggested Growing ‘Brexit’ Support,” Euro Exchange Rate News, June 6, 2016.)
The overall sensation is that the market is as adept at confronting the risk of a Brexit as it is to Bremain—the status quo. As the Brexit referendum approaches, investors have not paid attention. As a result, the British pound may have been less volatile than some investors expected. Most currency traders, especially cable traders, have simply trusted that everything would go in the right direction. Nobody, until now, seemed ready to accept the fact that there is a real chance the U.K. will abandon the EU.
This means that the GBP to USD exchange rate will experience much greater volatility over the next few weeks, as investors come to grips with reality.