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GBP Plunges to 7-Year Low Against USD

GBP plunges against USD
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February 24, 2016 By: , No Comments

GBP faces fresh assault from speculators as June 23 referendum looms

The sterling came under increasing pressure on Monday, 22 February as British Prime Minister David Cameron wrapped up a meeting in Europe about Britain’s continued membership of the European Union. On Friday, 19 February, Cameron attempted to finalize a deal with the European Union, fighting for certain conditions to be met with regards to migrant workers, employment benefits and the power of the City of London when it comes to European Union legislation. Though there was notable opposition to Cameron’s proposals, he managed to come to consensus with EU leaders on certain aspects of his government’s proposals. However, the Mayor of London, Boris Johnson has come out strongly in favour of Britain’s exit from the EU. The current dilemma facing UK voters and the EU as a whole is strangely reminiscent of the Scottish referendum on secession from the United Kingdom. That vote fell flat and the Scots overwhelmingly decided to remain with the United Kingdom for the many benefits that it entails. However, there is less desire amongst UK citizens to remain as part of the European Union given the huge financial and social challenges facing the 28-nation bloc.

Brexit Referendum Generates Massive Instability in Currency Markets

The June 23 referendum is slated to be a close fought affair, but the pressures are already being felt on the sterling. The British pound weakened to its lowest level in 7 years against the greenback, briefly touching 1.40760, before strengthening to 1.41515. Markets tend to react poorly to increased levels of volatility and this is precisely why the pound came under attack by currency traders. For the next 4 months, analysts agree that the GBP will face waves of assaults, weakening substantially against the euro, the USD and other G-8. This will naturally impact on the cross-currency exchange rates between other related currencies including the EUR and the JPY etc. The volatility is precisely what is driving bearish sentiment in the currency market. As a case in point, the GBP was trading at the following levels against other currencies:

  • EUR/GBP – 0.77895 (+0.66%)
  • GBP/ARS – 20.71400 (-0.504%)
  • GBP/AUD – 1.95815 (-2.635%)
  • GBP/CAD – 1.94005 (-1.988%)
  • GBP/CNY – 9.23860 (-1.521%)
  • GBP/JPY – 159.85000 (-1.315%)
  • GBP/NZD – 2.11025 (-2.677%)

 

For its part, the USD has capitalized on recent equities strength with major averages around the world gaining confidence, including the Nikkei 225, the SSE 180, the Dow Jones Industrial Average, the CAC 40, the FTSE 100 index and others.

London Mayor Seizes the Initiative in Current Saga

Similar declines in the GBP against most every currency were recorded, as speculators sold pounds en masse. Perhaps the strongest driver of sterling weakness in the final week of February was Boris Johnson – the Mayor of London. Overall, the pound lost approximately 3% against most of the major currencies, owing to the tremendous levels of uncertainty that are now evident in the global markets. The Eurozone economy remains precariously balanced, and fears of a Brexit are certainly not helping to drive positive sentiment. Besides for France and Germany, the UK is one of the strongest economies in the Eurozone. There is tremendous uncertainty about precisely what shape and form a British exit (Brexit) from the European Union would look like.

It may well be that the London mayor is attempting to gain political leverage by making waves on the issue of the June 23 referendum. Currency exchange transactions endured a tumultuous time in the UK and elsewhere as the sterling lost traction and went into freefall. For the next 4 months there are bound to be high levels of volatility in the corporate sector and the private sector alike. Currency exchange rates between the GBP and others will naturally favour UK exports and make imports substantially more expensive if the current trends continue. One of the winners in the scenario is the USD which is now at a multi-year high against the GBP, and the US dollar index which is trading at 97.39 (February 23, 2016). The 52-week-the US dollar index (DXY) is at 100.51, and the bullishness of the greenback has helped to restore confidence in equities markets, while causing a reversal in gold demand.

British Prime Minister David Cameron defended his recent 2-day meeting with European Union leaders by stating that the UK will have greater control over things like immigration and welfare and bailout power. Additionally, Cameron pointed out that the terms of the agreement will not leave the UK vulnerable to becoming economically, politically and socially entrenched in the European Union – on the contrary Cameron believes that the ever closer to union fears will not come to pass. But the other side – the proponents of a British exit – is not buying the Prime Minister’s rhetoric and opponents believe that in the absence of a treaty, the UK will not have any power returned to it as a sovereign state within the European Union. Another problem is that the in-work benefits claimed by migrants (to make up 6% of the workforce) account for 10% of all benefits paid out. The next 4 months will prove critical for the UK and the GBP and speculators are ready to cash in with herd mentality behavior.

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