Downside for the British Pound
The GBP to USD exchange rate has bounced back, bolstering the dollar in back-and-forth volatility reminiscent of a tennis match. After building strength last week, the British pound has started to reflect the Bank of England’s zero rate.
In a report published yesterday, the Bank of England (BoE) outlined the potential risk of a global slowdown. Meanwhile, the possibility of a Brexit remains present as the referendum to be held on June 23 approaches. (Source: “Sluggish services sector performance in March hints at UK slowdown,” The Guardian, April 5, 2016.)
The U.S. dollar, meanwhile, continues its recovery on the back of the publication of strong employment figures in the United States. The U.S. Department of Labor reported the creation of 215,000 non-farm jobs in March, which was higher than consensus expectations that anticipated 205,000 new jobs. (Source: “US economy adds 215,000 jobs as unemployment rate inches up to 5%,” The Guardian, April 2, 2016.)
Meanwhile, the recent Brussels attacks have raised the prospect of a rise in hostility of public opinions over immigrants and refugees in the U.K. This is the very sort of thing that could swing voters in favor of a “Brexit” in the upcoming referendum over the U.K. exiting the European Union. The closer the outcome weighs in favor of a Brexit, the more the GBP/USD rate moves in favor of a stronger dollar and a collapse of the British pound.
From a technical analysis perspective, the GBP/USD confirms the downside risk in the medium term, pressing the rate below $1.424. There is some support at $1.413 but $1.400 might be possible.
However, the British political situation could heat up, placing downside pressure on the British pound. British Prime Minister David Cameron is under pressure and scrutiny, as he is one of the people affected by the so-called Panama Papers through his father Ian. The files accuse him of hiding his financial fortune from British tax authorities for years. Cameron’s timid response betrays the fact that other important figures in his party could be involved in the scandal. The more directly implicated Prime Minister of Iceland, David Gunnlaugsson, has already resigned just two days after news of the allegations first broke. Cameron could have a similar fate.
Going back to the Brexit, Cameron is the government’s primary representative arguing against the referendum. Likewise, 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.) Simply put, the pound sterling will be the main victim of a Brexit scenario.
Indeed, the fortune of the GBP owes less to the Bank of England’s economic indicators and more to the dollar’s depreciation resulting from the Fed’s low interest rate policy. Therefore, the GBP’s bullish tide could be rather short-lived. The cable (GBP/USD pair) will become more volatile as the June referendum approaches. Indeed, the fear in the U.K. is palpable, as almost all of the financial institutions have urged the British to vote in favor of keeping the U.K. in the European Union in June’s referendum.
At the very least, the short-term fate of the GBP/USD could be decided on June 23.