Watch Out for the British Pound
I have a message for all currency traders out there: the British pound is the play of 2016. Just this week, the GBP to USD had its biggest one-day fall since 2009, suggesting the currency is building towards an epic crash. What should you do? (Source: “Pound heading for biggest one-day fall since 2009 on Brexit fears,” BBC, February 22, 2016.)
The first thing to do is to ask yourself this: do you want to make money or do you want to feel comfortable?
There’s probably not enough room for you to do both. Currency trading can force you to set aside your emotions and do what is necessary. That’s simply the price of success.
For instance, I am a Canadian who saw the Canadian dollar collapse last year. It was painful, but I managed to call those losses way ahead of time. My affections didn’t cloud my judgment, because facts and numbers don’t lie. Trust them if you want to trade successfully.
Right now, all the facts point to a dramatic collapse in the British pound.
“Brexit” Fears Spark a Run
First off, there’s the possibility of Britain leaving the European Union (EU), otherwise referred to as the “Brexit.”
There are some really deep concerns that people have about the power of the European Union, none of which have been fully addressed by the bureaucrats in Brussels.
Estimates suggest that 15%–20% of British policy is created by the EU. That effectively means British voters don’t control their own destiny. The truly important decisions are made by unelected powers sitting on the European Commission. (Source: “Boris Johnson exclusive: There is only one way to get the change we want – vote to leave the EU,” The Telegraph, February 22, 2016.)
So it doesn’t surprise me that we’re seeing a mass movement toward separation. But I hope the British have truly considered the impact it would have on their economy and, in turn, the GBP to USD exchange rate. It’ll take years to untangle Britain from the web of EU regulations; that could seriously jeopardize the country’s growth.
For instance, the British pound fell two percent against the U.S. dollar earlier this week. What’s interesting is that we can trace the pessimism back to a single piece of news: the Brexit.
It all started over the weekend, when Prime Minister David Cameron announced the date of Brexit referendum. Then the mayor of London, Boris Johnson, came out in favor of leaving the EU. He wrote an impassioned argument for separation in a British newspaper.
The selling started immediately. Johnson is one of the most popular politicians in England and his support for a Britain-EU separation could tip the balance away from the EU.
Regardless of the outcome, this level of uncertainty could hurt Britain over the next year. Things that could actually help the economy, like trade and business investment, will take a backseat. No one will care about anything other than the referendum.
That means that the Bank of England could be forced into extending its stimulus program. It will likely keep the printing presses flowing at full steam, with continued rock-bottom interest rates expected. Once again, the central bankers would have to cover for politicians not doing their jobs.
In either case, whether Britain does or doesn’t leave the EU, there is little hope for the GBP to USD. It has already shed four percent since the start of January, leading me to believe there is a full-blown crash on the horizon.
I’m staying far away from the British pound.