Talks about no agreement between the UK and the EU sent GBP/USD down to 13-months lows

The British pound doesn’t cease setting negative records. It has been falling down to the U.S. dollar during 12 trading sessions for the first time for CBPUSD since 2008. While the greenback is getting use of the US economic growth, the Fed’s monetary normalization and trade wars, the pound is bogged down in the political problems. Investors are excited by the UK trade minister Liam Fox’s speech that it is 60% likely the U.K. will fail to agree on a divorce deal with the European Union before it leaves it and by the governor of the Bank of England Mark Carney, staying the risk of a no-deal Brexit is "unpleasantly high". The situation has been fueled by the UK foreign minister Jeremy Hunt, who said that no deal with Brussels will seriously weaken the British pound.

It isn’t yet clear why the UK officials are actively dwelling upon the topic. Do they want to unite the supporters and the opponents of Brexit? Do they want to put a pressure on the EU? GBP is already fast towards 1.2, the Reuters median forecast in case no-deal divorce with the European Union. And the actual exit is far ahead.

Politicians’ speculations increase pound volatility, result in the capital outflow from the UK stock market and make life difficult for the Bank of England. In late 2017 and early 2018, higher inflation rate at 3% due to pound devaluation after the referendum on Brexit made the BoE to raise the bank rate. And in the context of weak economy such measures may be dangerous. The situation can repeat very soon. For example, an increase in consumer price growth rate resulted in talks about the further monetary restrictions. In fact, BoF projections suggest CPI increase up to 2.6%, followed by its decline.

Dynamics of UK inflation

Source: Bloomberg

Policy uncertainty and strong volatility, associated with it, make foreigners move away from the UK stock market. In dollar terms, the domestic stocks are down versus international securities to the lowest level since the 1970s! The capital outflow from Great Britain to the USA is a strong reason for CBPUSD deeper drop.

Dynamics of MSCI UK index and MSCI world index

Source: Bloomberg. 

So, strong dollar, policy uncertainty and doubts about correct BoE decision on the Bank rate in August amid not that positive UK statistics pressed CBPUSD quotes down to 13-months lows. Of course, bears need a rest, however, the reversal of the pound downtrend can be suggested only after the UK-EU agreement, the end of trade wars or a slowdown in the U.S. economic expansion. I don’t think something like this will happen; therefore, I think CBPUSD is more likely to go down towards 1.24-1.25 than to go up to 1.3.


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Price chart of GBPUSD in real time mode

Pound is Bogged Down in Policy Matters

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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