Posted October 05, 2016 Ben McDonald
The British pound has slumped today over comments from UK Prime Minister Theresa May that the country is set for a “Hard Brexit”. The official negotiation period will be issued to the EU in March 2017. Which means Article 50 will be released which will trigger the 2 year negotiation period in which Britain will negotiate leaving the EU. However, as stated by EU officials since the Brexit vote, Britain must allow freedom of EU citizens if they want to retain access to the EU marketplace. As May mentioned in her speech, getting immigration under control is number one importance, this implies access to the EU marketplace will be lost to UK exporters.
This separation from trade activity with the EU may force the MPC to cut rates further into 2017. Lower interest rates will mean UK yield chasers will look for better returns further reducing the value of Cable. Added to this, the US FOMC state a rate hike is likely before the end of 2016 which will drive Cable even further south as investors are likely to move assets into USA higher yielding bonds.
However there seems to be economic resilience from the UK manufacturing sector. IHS Markit’s September purchasing managers index rose to 55.4, the highest level seen since mid 2014. A number higher than 50 indicates the sector is growing. The lower pound has been a boost to the countries exporters.
Funds and Analysts continue to wager bets and revise outlook for a lower Cable. Leveraged funds have increased their bets on a lower Cable. Increases in short Cable have grown from 2.7 billion to 5 billion dollars from U.S. Commodity Futures Trading Commission data (Sept 27, 2016).
As the CABLE drops further when will it find resistance? Deutsche Bank believes a closing price of 1.25 by the end of 2016. If this prediction is correct true this would take us even farther than the 31 year lows we have right now, at $1.27. The Pound is also at 5 year lows against the Euro, where it is looking to test 1.13 to the downside. With uncertainty over Brexit negotiations, UK rate cuts and US rate hikes likely at the end of 2016 it is difficult to see an end to the current fall in Sterling.