Who Let the Air Out of the British Pound?
The Brexit saga continues to weigh heavily on the fortunes of the British pound. Now, currency analysts are speculating that the British pound (GBP) could move towards parity with the Euro (EUR) if a bad Brexit deal unfolds. At the time of writing (August 15, 2017), the GBP/EUR pair was trading 0.38665% lower at 1.09614. This is now the lowest level for the British pound all year. Consider that the GBP started 2017 at 1.1762 to the Euro and has effectively lost €0.08 for every £1 traded. The GBP/EUR pair is moving rapidly towards parity. Over the past 5 days, this currency pair is down 0.86%, over the past 1 month it is down 3.05%, and over the past 3 months it is down 5.66%. For the year to date, the pound has shed 6.55% against the EUR.
If we turn our attention across the Atlantic, the GBP/USD pair is trading below the critical 1.2900 support level and is now at 1.2869. Fortunately for cable bulls, the current level is snugly within the 52-week trading range of the GBP/USD. On the low end, the pound/dollar exchange rate is trading at 1.1789, and on the high-end it rose to 1.3446. For the year to date, the GBP/USD pair is up 4.24%. This should be evaluated against the lackluster performance of the dollar for 2017. The DXY – US dollar index – is down approximately 8.33% for the year to date, in line with its general performance against the Japanese Yen, the British pound, the EUR, the Canadian dollar, and others.
Why the Sudden Slump in the Sterling?
For starters, UK inflation figures came in under expectations. This means that the BOE (Bank of England) is unlikely to pull the trigger on a rate hike anytime soon. Major market players such as Morgan Stanley predicted that the GBP/EUR could reverse course and fall below parity (1:1) early in 2018. This would be a dramatic reversal in the pound’s fortunes, which has heretofore been one of the world’s best performing currencies.
According to the latest ONS figures, consumer prices rose at an annual rate of 2.6% during the month of July. Economists were forecasting a rate of 2.7%. This is disconcerting to Sterling traders, and they reacted accordingly. The current bank rate in the United Kingdom is at an historically low level of 0.50%. Talk of increasing that rate began circulating in financial markets, but has not gained traction yet.
The more pressing concern for the GBP is the nature of a Brexit. If a hard Brexit ensues – no strategic roadmap for Britain’s extrication from the European Union – the GBP will feel the consequences. RBC Capital Markets Forex strategy head, Adam Cole, anticipates the GBP hitting a nadir against the EUR before the end of the year. The more uncertainty that is brought to bear on currency markets, the greater the likelihood that the GBP will bear the brunt of it. CPI data is making it difficult for the BOE to justify a rate hike. While the fundamentals of the UK economy remain sound, it is the speculative activity around Brexit negotiations that is weighing on market sentiment.
What about UK Inflation Figures?
The UK has been beset by steadily decreasing prices recently. This is being driven by cheaper crude oil prices, in contrast to what analysts were expecting recently. There were inflationary drivers in the UK economy of late, notably furniture and household goods, housing and household services, clothing and footwear, and food & nonalcoholic beverages. However, the declines in fuel prices reversed CPI figures for transportation. For its part, the BOE anticipates inflation to hit 3% by October 2017.
Is the run on the GBP justified? Many currency traders and speculators feel that the diminished prospects of a rate hike in 2017 warrant put options on the GBP.
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About Brett Chatz
Brett Chatz is a graduate of the University of South Africa, and holds a Bachelor of Commerce degree, with Economics and Strategic management as his major subjects. Nowadays Brett contributes from his vast expertise in online trading for iForexTrader.co.uk.