Sterling struck a new 31-year low against the US Dollar last week as investors pulled out of commercial property funds in reaction to the UK’s decision to ‘Brexit’.
Pound Hits New 1985 Lows
‘Cable’ started last week’s session at a 31-year low of 1.33 and avoided further losses on Monday even though UK construction activity slowed to its lowest level since 2009.
However, the Pound struggled on Tuesday as three major UK commercial property funds banned withdrawal requests following an overwhelming desire among investors to cash out in reaction to ‘Brexit’. GBP/USD weakened three cents on the day.
The Pound to US Dollar exchange rate struck another new 31-year low of 1.28 on Wednesday morning as more property investment companies froze trading, leaving over half of the £25 billion sector on ice. Markets were extremely concerned by the news because commercial property prices are now liable to plummet as the funds sell off property to repay investors. In the UK 75% of small businesses use commercial property as collateral for loans and if these properties fall in value it will become much more difficult for SMEs to obtain funding. The fear is that expansion and hiring will slow as firms pause to evaluate the impact of ‘Brexit’ on their businesses. Indeed, the Bank of England (BoE) estimates that for every 10% drop in commercial property, general economic investments slips 1%.
On Wednesday evening the Federal Reserve’s latest minutes report revealed that policymakers were likely to remain on the sidelines for the foreseeable future as the central bank waited to see how much of an impact the EU referendum has on global and US markets.
GBP/USD struggled to make any lasting gains on Thursday as investors bet that the BoE would cut interest rates in July rather than August. British data from the NIESR indicated that the UK economy had already started to shrink in June, suggesting we could experience another recession over the next few quarters.
Friday saw US non-farm payrolls print robustly at 287,000, massively adding on the previous score of 11,000. However, the general consensus was that the Fed would refrain from hiking rates despite the decent print and this allowed Sterling to steal a 0.7% daily gain.
What Next for GBP/USD?
Sterling is trading flatly at the beginning of this week’s session in response to news that Conservative leadership candidate Andrea Leadsom has dropped out of the race, paving the way for Theresa May to become the first female Prime Minister since Margaret Thatcher. Traders cheered the announcement because it would provide at least a little more political stability.
The highlight of the week, however, is Thursday’s rate decision from the BoE. If the UK central bank decides to cut rates from 0.50% to 0.25% (as expected) then the Pound could easily fall to fresh three-decade lows versus the safe haven ‘Greenback’. Sterling’s losses would likely be even steeper if the bank cuts rates to 0.50% or unleashes another round of quantitative easing.
There is a possibility, however, that the BoE opts to leave rates on hold and waits for August’s inflation forecast to loosen policy. Under these circumstances Sterling could mount a temporary rally on Thursday afternoon, but GBP/USD will likely depreciate as the August 4th announcement approaches.