Sterling crashed through a number of support levels against the US Dollar last week to hit a series of fresh three-decade lows, declining six cents in the process.
‘Hard Brexit’ Drags Pound Lower
GBP/USD tumbled to a three-month low just south last Monday as markets pulled out of the Pound due to fears that the British government’s plans to initiate a clean break from the European Union (and the benefits of the single market) would deter foreign investment and consequently put significant pressure on the UK’s overbearing current account deficit.
‘Cable’ slid to a new 31-year low on Tuesday, despite strong showings from September’s manufacturing and construction PMI reports, as ‘hard Brexit’ or ‘Smexit’ – exit from the single market – fears persisted.
UK To Avoid Recession In 2016
A sanguine service sector PMI print of 52.6 all-but banished concerns that the UK would slide into recession in the second half of the year. However, the Pound still traded flatly versus the ‘Greenback’ in a sign that markets are more worried about the UK’s long-term structural issues than the current economic performance and implications for monetary policy.
Comments from UK Chancellor Phillip Hammond on the need to rein-in EU immigration, coupled with German Chancellor Angela Merkel’s assertion that no nation will be granted access to the single market for goods if they do not agree to the free movement of people, drove GBP/USD to a fresh 1985 low on Thursday.
GBP/USD Loses 12 Cents In Minutes
During overnight Asian trade on Friday GBP/USD was subjected to extraordinary volatility. Within a matter of minutes GBP/USD plunged from 1.26 to 1.14 and then bounced back to 1.24. Nobody really knows what caused the ‘flash crash’ but most analysts agree that the mammoth move is a warning sign for future depreciations.
Having started the week close to 1.30, Sterling now looks unlikely to return to trending above 1.25 anytime soon. With investor sentiment so weak, there is a very realistic chance that the Pound to US Dollar exchange rate could slide towards 1.20 over the next few weeks. Over the next two years many investors are forecasting GBP/USD tumbling to 1.10.
Week Ahead
December Federal Reserve rate hike bets were barely softened by a lower-than-anticipated US non-farm payrolls print of 156,000 last week and it seems fairly likely that the US central bank will raise rates before the year is out. US retail sales data is tipped to come in at 0.4% on Friday, while Fed Chairwoman Janet Yellen is due to speak in Boston on Friday. If Yellen maintains a mildly hawkish outlook then we will probably see the ‘Greenback’ push ahead against the Pound.
GBP/USD’s next moves will probably be smoother than the six-cent depreciation of last week, but there is every chance that the Pound will fall in value further over the coming weeks and months.