The surprise Brexit referendum results sent the British pound weaker. Just two weeks after the UK voted to part ways with the EU, the pound sterling has set quite a few records, most notably, becoming the weakest currency in the world.
After initially falling to Brexit lows of 1.322 and posting a recovery that did not convince anyone, the sterling resumed its declines last week, breaking below the Brexit lows.
It was the Bank of England Governor Mark Carney's comments on Tuesday, July 5th which saw the renewed selling pressure emerge, sending the GBP to new historic lows. The Bank of England released the financial stability report and also lowered the cyclical capital buffer requirements to zero.
Mark Carney also said he wasn't too worried about the declines in sterling, and said that the currency's devaluation was probably required to help the UK adjust to a post-Brexit world. GBP/USD closed the week at 1.2938, a level that was last seen in 1984/1985 during the height of the ERM crisis.
The fall in the sterling saw the GBP overtake the Argentinian peso to become the worst-performing currency against the dollar among the 312 currencies.
Bank of England’s policy decision weighs
The decline in the sterling is just getting started, with many expecting the GBP to see $1.20 over the next three months.
In the immediate short-term outlook, the Bank of England's monetary policy meeting this Thursday, July 7th, could turn out to be another catalyst. Many expect the Bank of England to cut the interest rate by 25 basis points, bringing the rates to new historic lows and the first rate cut in nearly 7 years. There is also speculation that the central bank could ease monetary policy by expanding its Asset Purchase Program.
Even if there is a remote chance that the BoE could wait to complete its full assessment in August, the central bank will likely come out strongly dovish, leaving the British pound to continue extending its declines in the near term.
While it is still too early to assess the impact of the Brexit verdict, last week’s data (ahead of the June 24th referendum date) already showed deteriorating sentiment. Construction and services PMIs by Markit fell to seven-year lows, with construction sector falling below the 50-level, indicating contraction in the sector.
However, the full impact of the business sentiment and outlook will be seen only in August – September. There is scope that the BoE could thus hold back from cutting rates this early, which could see some recovery in the GBP.
GBP/USD – Technical Outlook
While the fundamentals remain in favor of the sterling extending its declines, traders who are still looking to ride the declines in the GBP are better off waiting for a short-term rebound in prices.
On the 4-hour chart, GBP/USD can be seen trading within the descending triangle which emerges after the strong bearish price action. The technical levels we see here are 1.38 - 1.36, which make for an ideal level for any retracements to take place. This view can be confirmed on a daily close above 1.305.
To the downside, an extended decline by 1.285 could potentially invalidate and put to rest any hopes of a rebound, in which case GBP/USD could continue falling sharply with a test to $1.20 very likely.
