GBP to USD: This Could Spell Doom for the British Pound

GBP to USDMore Downside for the GBP to USD Exchange Rate

All bets are off on the Brexit. The bookies will actually take your money over the result of the June 23 referendum. And it’s no small result—the Brexit carries the fate of Prime Minister David Cameron’s leadership of the U.K. and the fate of the British pound (GBP), having a strong effect on the GBP to USD exchange rate.

The Brexit polls appear as if they have stabilized—for now, that is—but the picture they paint is anything but positive for the British pound. They suggest a majority of Britons want out of the European Union (EU). The GBP to USD plunged as the latest polls suggest that there is more support for Britain to leave the EU than to stay in it. It was just a few weeks ago that the polls pointed to the opposite outcome. (Source: “Pound Drops as New Brexit Poll Shows ‘Leave’ Camp Taking Lead,” Bloomberg, May 31, 2016.)

The surprise effect may have caused a bigger-than-normal spill on the British pound, which has taken a hit. The GBP to USD lost almost a full percentage point, dropping to $1.45, its lowest level since May 3. Yet, this kind of volatility will only become more intense as the Brexit referendum date approaches. Indeed, hedge funds appear to be commissioning polls for the purpose of speculating on the GBP. The political sentiment is but a byproduct of what is becoming much more of a financial episode.

The London bookies have raised the odds for a Brexit. One of the most famous bookies William Hill said that 85% of those betting punted in favor of the Brexit. Given that the polls have varied often, the careful punter will continue to exercise caution before betting.

What is certain is that the outcome of the Brexit referendum is not in the least certain. This will keep the GBP alive and the GBP to USD rate fluctuating frequently over the next three weeks. (Source: “Pound Drops On New Brexit Poll; Options Indicate Volatility,” Investor’s Business Daily, May 31, 2016.)

So long as the surveys were favorable to the “Bremain” (those who want Britain to remain in the EU), the cable (GBP/USD pair) was moving ever more in favor of the pound sterling. The British currency was actually the best performer in the pro-Brexit perception period in a group of 10 peer currencies. (Source: Ibid.)

It seems like the economic arguments—from the likes of the Bank of England, U.S. President Barack Obama, and, of course, Prime Minister David Cameron himself—have failed to impress the majority. It seems that Britons have grown warier about illegal migration. News of the landings of illegal immigrants on British shores has spooked many Britons far more than a lower British pound.

Apart from the Brexit referendum, Janet Yellen’s hints that the Federal Reserve could soon make another rate hike have not done the GBP any favors. The rate hike potential, meanwhile, comes as the U.S. experienced the largest one-month spending increase since August 2009.

If the Brexit fears intensify in response to more polls, the GBP to USD, which had moved in favor of the British currency in the past few weeks, could head back to its historical minimum of $1.38. If a Brexit actually happens, the cable could cross that mark into new record-lows for the British pound sterling.