GBP to USD: This Is Why the British Pound Still Risks Collapse in 2016

GBP to USDMore Downside for the GBP to USD Exchange Rate?

One of the essential analytical points to note in the mid- to long-term prospects for the British pound in 2016 is that the Brexit referendum has already faded as a predictor of the GBP to USD performance. Indeed, the curve is not as sharp as it had been with the rise toward $1.4584 resistance testing. The GBP has the strongest support at the $1.43 level.

Yet, there are also doubts about the U.S. Federal Reserve’s willingness to make another rate hike. This means that the GBP to USD could remain essentially stable—at least until the Brexit referendum on June 19. If the Brexit passes, the British pound would collapse against the dollar, regardless of what rate action the Fed takes.

For most of 2016, there has been a barrage of alarmist predictions about the impact of the Brexit referendum on the GBP to USD exchange rate. But, in the first week of May, the British pound absorbed the drop of the previous months (against the U.S. dollar), pushing the British currency to new heights. Indeed, many analysts, and admittedly myself included, were keeping track of the Brexit as an indicator of the GBP to USD pair’s trading patterns, it turns out that it’s actually also about the economy. What a novel concept that is.

Specifically, the data about industrial production and the trade balance, coming ahead of the next meeting of the Bank of England could be weak. This could prompt some members of the Bank of England to cut rates instead of raising them. (Source: “Pound Sterling (GBP) to US Dollar (USD) Exchange Rate Trails on UK Economic Fears,” Future Currency Forecast, May 9, 2016.)

Many expect the British economic indicators to be weak, which will encourage those advocating a rate drop. Normally, that would raise a bullish scenario for the dollar, but U.S. economic data is also showing uncertainty. The Federal Reserve will have difficulty deciding whether to raise the prime lending rate again, as its members had hinted after the December rate hike. As both the GBP and the USD are facing similar pressure against rate hikes, the pairing should not see any substantial variation. (Source: “Pound To Dollar Rate Fails To Recover Despite Soft 2016 Rate Hike Bets,” Exchange Rates, May 9, 2016.)

The slowdown in economic activity could encourage the Bank of England (BoE) to remain reluctant to raise rates. Nevertheless, the decline in economic activity itself in the U.K. might be the result of fears of a Brexit. This means they are temporary. Given the evidence suggesting voters will reject the Brexit, the economy and manufacturing could see a strong rebound in the early summer (the referendum is in June), which suggests the British economy would rebound, triggering a BoE intervention that could see the GBP to USD surge.

The anti-Brexit rhetoric got a strong boost recently. British finance minister George Osborne warned property owners (presumably Conservative party voters, most of whom are favoring the Brexit) would suffer “significant backlash” from Britain leaving the European Union. A Brexit would cause falling home prices and mortgages that are more expensive if voters choose to leave the EU in June. (Source: “Brexit would hit house prices significantly, says George Osborne,” The Guardian, May 8, 2016.)

Prime Minister David Cameron even said that Britain has a much better chance of fighting terrorism by staying in the EU, urging Britons to vote against the Brexit on June 23. Yet, for all of the efforts to discourage it, the Brexit remains a possibility, according to polls suggesting the nays to Europe lead at 51%. (Source: “As EU celebrates ‘Europe Day’ FIFTH consecutive poll puts Britain on course for Brexit,” Express, May 9, 2016).

While caution is always useful in making predictions, the latest results suggest that the pro-Brexit sentiment remains a menace. The economic figures to be released this week will also affect where the GBP is heading. The Brexit is spoiling the party for the British pound and creating uncertainty. The GBP to USD will be under pressure until the referendum.