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As the Brexit Story Gets Old, the Pound Looks to Bounce Against the Dollar

A popular question being directed at foreign exchange practitioners is whether or not they see pound sterling staging a recovery following the relentless selling we have seen in 2016.

Currency exchange question answered

All moves must at some point come to an end. Sentiment towards GBP remains weak however the frenzied selling that we had seen earlier in the week appears to have run its course, at least in the short-term.

The decline in sterling has been dramatic, in fact we could be in for the worst monthly close in over 30 years.

Levels in the pound to dollar exchange rate (GBP/USD) below 1.40 were last seen when the Bank of England was churning out money via their printing machines and slashing interest rates back in 2009.

Beyond this, we would have to go back to the 1980s to see sterling at such low levels against the dollar.

Long-term history of the pound to dollar exchange rate

“Do you think the Pound will bounce from here?" is a question being sent to foreign exchange practitioner David Johnson on a regular basis these days.

“Everyone I spoke to yesterday asked pretty much the same question,” says Johnson, “and the answer is another question really.”

Johnson continues: “If you were a hedge fund manager or an international investor and you had the option to invest in Sterling where the EU vote is in the offing or elsewhere in countries that don't have that hassle, then where would you put your money?”

On the basis that investors are generally (with a few exceptions) very cautious, the answer is that sterling is most likely to find fewer buyers in the months ahead.

“So those who have to sell the Pound to buy other currencies will have to choose their opportunities carefully or buy on a forward contract to guarantee a rate,” says Johnson.

Latest Pound / US Dollar Exchange Rates

United-Kingdom United-States
Live:

1.2692▲ + 0.03%

12 Month Best:

1.3322

*Your Bank's Retail Rate

 

1.226 - 1.2311

**Independent Specialist

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

Brexit Story Getting Old, ING See a Monday Bounce

“Now that the 'shock and awe' factor of a potential 'Brexit' has coursed its way through the system, investors have a chance to recalibrate their short-term concerns with longer-standing, overarching thematic influences,” says Christopher Vecchio, Currency Analyst, at DailyFX.

There is a growing feeling in some quarters of the foreign exchange community that the British pound has been punished unnecessarily.

As DailyFX’s Vecchio points out, the current pause may be attributed to emotions subsiding and logic prevailing.

“FX markets especially have been treating the Brexit headline since Sunday as an indication that the UK would leave the EU entirely, not that it would be opening up a two-year negotiating window to amend its status,” says Vecchio.

The analyst suggests there should be more focus on the implications of the UK perhaps realigning itself more like Norway or Switzerland.

“That's to say the worst case scenario is only being discussed; none of the more likely intermediate options are,” says Vecchio.

Lee Sue Ann at UOB in Singapore notes that while the outlook for GBP is still viewed as bearish, "severely oversold conditions coupled with early signs of momentum slowing down suggests low odds of extension  lower to the next support at 1.3800."

There are also reports that the UK are to put the issue of the EU vote and the potential risks surrounding Brexit before the G20.

"Should the UK manage to include into the G20 communique the reference of the Brexit being a risk to the global financial stability (as news reports suggest), there is a scope for a short-term GBP relief rally on Monday given the large degree of Brexit risk premium priced into GBP," says Chris Turner at ING.

ING's model suggests that around 3-4% of risk premium is currently priced into GBP/USD, equivalent to the peak levels priced into GBP ahead of the Scottish referendum and UK parliamentary elections.

DNB Say the Pound is Due a Rebound

Analysts at Norway’s largest investment bank are calling a recovery in the GBP to EUR exchange rate.

“We expect to see a (bumpy) improvement of the global risk sentiment, the start of Cameron Bremain campaign reducing Brexit risk and interest rate expectations to rise. At the other side of the English channel, we expect Draghi to act on his guiding of further stimulus, keeping the EUR under pressure,” says Magne Ostnor, FX Strategist at DNB Markets.

DNB also say that global stock markets should start improving from here creating an environment that is typically kinder to the pound than it is to the euro.

With that in mind DNB recommend shorting the EUR/GBP to target a recovery in the pound.

Other strategists are more constructive on sterling.

"Whatever the situation, the GBP's strong reaction (lower) seems excessive. Indeed, against some currencies it may be a good time to consider fading the most recent moves," argues Richard Falkenhall at SEB Bank.

SEB argue that even if the UK were to exit the European Union the country would remain a member until a new arrangement for the transition as well as the long-term relationship is negotiated.

SEB's top trade for 2016 was a short on GBP/USD and they will look to exit the trade sub-1.40, but importantly, they are not looking to add to the position in order to chase sterling lower.

Is Brexit Really THAT Bad? Neil Woodford Doesn't Think So

The UK, one of Europe’s best performing economies, has come in for a right royal bashing over the past few days, dominated by harsh threats from big business.

"Thanks then to respected fund manager Neil Woodford for having the backbone to come out and say that the consequences of the UK leaving the EU, while likely profound, are actually rather difficult to forecast," notes Augustin Eden at Accendo Markets.

Brexit may not be the harbinger of doom for the UK economy those 200 business leaders make out, and if this is proven correct then the pound may find itself moving higher once more.

"In fact, we may see the grim reaper pay a visit to the EU instead, which faces a multitude of economic, social and political problems of its own. I really hope we see some sanity return to this debate very soon," says Eden.

Data is Pretty Good, UK Outperforming Germany

The pound really is undervalued if we were to consider the economics behind the currency.

Coming in unchanged at 0.5% the UK’s second estimate fourth quarter GDP figure places the country atop the G7 growth race for the final 3 months of 2015, the closest rival Germany’s 0.3% expansion.

"The number was enough for the FTSE to increase its gains to 130 points, the index continuing to receive the double bump of a dividend lifted Lloyds and a verdant commodity sector," says Connor Campbell at Spreadex.

The Eurozone’s data was problematic this Thursday; whilst, at 0.3%, the region-wide inflation figure was at its highest point since just before the Grexit crisis last summer, this still marks a drop from the initial 0.4% (and 15 month high) reading.

The data is strong enough to suggest UK interest rates should be rising and should an In vote prevail then we would certainly look for a solid bounce in sterling.

Pound Will Plummet say HSBC

HSBC are pushing their narrative that there is only downside ahead unless markets get the sense that Brexit is firmly off the table.

In a note to clients HSBC warn that the pound could hit parity against the euro in 2016 on the event of an Out vote.

Markets will need to become more confident that an In vote is gaining traction, for that reason any recovery in the British pound could lie with polling data.

Therefore it could be wise to watch the headlines as each major UK newspaper will likely increase the amount of opinion polls they publish on the subject.

Momentum Advocates for Further Declines

Then there is the technical setup behind the GBP/USD which currently shows no let up in selling pressures.

From a technical perspective we would look for a base to be formed on the charts from where a recovery move could take place.

We would look for at least two days of gains, at the bare minimum.

The technical picture continues to indicate further downside as the CitiFX options trading team notes BIG moves in implied volatility (clients buying protection to the downside).

"A monthly close below 1.3950 next week – would be a first since the mid-1980s would leave the 1.35 area as the next major support (the January 2009 low), with 1.3657-82 offering some interim support," says a strategy note from Citi.

Also watch GBP crosses that are currently eyeing major support levels – 150 for GBPJPY, 1.3815 for GBPCHF and 0.8000 for EURGBP.

Markets Latest

Market risk sentiment was mildly positive in Asia, as the two day meeting of G-20 finance ministers and central bank heads started in Shanghai.

China’s central bank Governor Zhou indicated that there is scope for further policy stimulus. In the UK, the GfK consumer confidence fell to 0 in February from 4, the weakest since December 2014.

BoE Governor Carney said that central banks have not run out of ammunition, but that stimulus needs to be well aimed.

 

 

 

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