The Pound to US Dollar exchange rate hit a 31-year low of around 1.31 last Monday and GBP/USD has hovered close to that level ever since.
Lowest GBP/USD Rate Since 1985
Sterling succumbed to its lowest level since 1985 against the ‘Greenback’ last Monday as a brutal combination of political and economic uncertainty drove investors to park their funds in the world’s premier reserve currency. The roadmap for ‘Brexit’ is uncertain, it could take many years and investors have no idea who will be leading the country through the arduous negotiation process. This supreme uncertainty is weighing heavily over the Pound and looks likely to continue to do so for a long time.
Despite the prospect of dampened economic output and political instability for many years to come, the 31-year low GBP/USD rate attracted some bargain hunters on Tuesday and Sterling managed to stage a 150-pip rebound to 1.33.
‘Cable’ rallied by a further 150 pips on Wednesday, to strike a weekly high of 1.35, as optimistic traders reacted to speculation that the next Tory Prime Minister could hold a parliamentary vote in attempt to keep Britain in the EU.
BoE Summer Stimulus Weighs On Sterling
However, the optimism ran out on Thursday and GBP/USD resumed its downtrend. Bank of England Governor Mark Carney promised summer stimulus to soothe the UK economy and Sterling depreciated as government bond yields hit record lows.
The Pound to US Dollar exchange rate continued to weaken on Friday as risk aversion trends caused investors to pile into UK government debt, thus depressing bond yields and eroding the appeal of Sterling to currency traders.
What Next For GBP/USD?
The most important events on the economic calendar to look out for this week are Tuesday’s BoE financial stability report and the Friday’s US non-farm payroll report. Wednesday’s Fed minutes report is unlikely to hold much sway over the currency markets because it refers to a meeting which took place before the EU referendum.
If the BoE’s projections are overly pessimistic then Sterling is likely to suffer. The Pound could also struggle if the US labour market report impresses, although the prospect of a 2016 rate hike from the Federal Reserve appears fairly dim following the ‘Brexit’ vote.
The ‘Greenback’ is seen as the world’s premier safe haven currency and as such the US Dollar is liable to appreciate further against the Pound over time as the impacts of the referendum result continue to play out. It’s difficult to tell how fast and how far GBP/USD will devalue, but some analysts are projecting an exchange rate of 1.20 by the end of the year.