Inflation data key risk ahead for British pound

The British pound has come under fire over the past 24 hours following the release of soft inflation data and an increase in the odds of the UK leaving Europe in the June referendum in the wake of the Brussels terror attacks.

  • Terror attacks in Brussels see odds for a Brexit slashed
  • Latest ICM poll confirms Leave campaign is ahead
  • Inflation data softer than forecast; fails to provide support for GBP
  • CitiFX: Sell-off has gone far enough

The recovery rally off the recent 7 year low in GBP/USD has stalled out ahead of key resistance at 1.4668, potentially setting the stage for the start of the next break lower. 

Since December the uncertainties surrounding the EU referendum in 2016 have manifested themselves in a weaker British pound as markets do not take kindly to uncertainty.

In fact, if there was no vote the pound would be trading above 1.50 according to reliable studies.

Most investment banks still see the GBP to USD exchange rate ending 2016 higher than it currently is, but this assumes the UK votes to stay in the UK. All are unanimous in calling for a lower exchange rate should the UK vote to leave.

Price action over the past 24 hours suggest a bias towards more losses is growing. "A break back below 1.4053 will strengthen this outlook and expose a retest of 1.3836, which guards against the multi-year base at 1.3500 further down. Back above 1.4668 would be required to take the immediate pressure off the downside," says a note from LMAX Exchange regarding potential direction in the pound to dollar rate from here.

A word of caution for those looking to bet on further declines.

CitiFX suggest that there is a risk that the Brexit theme leads to an overreaction.

"But with markets well alert to any factors influencing Brexit risks well in advance of the events in Brussels, the 2 big figure selloff is seen as enough for the time being given that the Brexit referendum is still 3 months away and markets eventually consolidate, thanks to improved liquidity condition and a recovery in equities and oil prices," say Citi in a note to clients.

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