The Pound continues to look weak against its trading partners with the currency resuming its decline on Tuesday as a result of the UK Prime Minister David Cameron finally confirming over the weekend that the date for the UK referendum to vote on the UK membership into the European Union has been set as June 23 following months of ongoing uncertainty over when the possible vote would take place. Even the FTSE has opened with a decline today and I think that the UK markets in general, including the British Pound are going to be vulnerable to further losses for the next months as the UK economy is set to encounter an increase in uncertainty over its future as the date for the historic vote looms closer.
Views and market expectations on the British Pound were already negative as we entered 2016, and investors have now found another reason to price in further weakness into the UK currency. There is absolutely no argument that a “Brexit” could be positive for the UK economy in the upcoming months, and I think that the only reason why David Cameron campaigned so hard for a referendum in the first place is because the terms of the UK membership in the European Union were major talking points throughout the UK election campaign last year. We are only a month or so past Chancellor George Osbourne making headlines by warning that the UK economy faces “a cocktail of different risks” with this being said before the referendum was confirmed, therefore you could only imagine his thoughts now that the UK economy is set for months of uncertainty.
News headlines across the globe, or at least domestically and within Europe are likely to be dominated by news on the upcoming vote for months and all investors have really been provided with further confirmation that investor attraction for a currency that has already suffered for months is going to sink even further. In essence, all we have done is to open the doors for further declines of the Pound as uncertainty dominates the atmosphere of the UK economy for the next four or five months on the possible outcome of the historic EU referendum vote. There will likely be swings and roundabouts as the vote approaches, and I think many investors and those in the markets like myself will remember the lesson of understating the risks of an exit in the days leading up to the famous Scottish Referendum around September 2014. Many market analysts, including myself, completely discounted the possibility of Scotland actually voting to leave the UK back then, and I think this is why investors will be mindful about this trip in recent memory when deciding how to react in regards to their investment portfolio over the upcoming months.
While traders of the GBP are likely to be finding opportunities for ongoing weakness against a host of different currencies over the next couple of months, I will continue to monitor how the GBP trades against the USD in the meantime. Traders have definitely used confirmation of the date for the vote to push the Pound back down to its milestone lows against the Dollar at 1.40 and if we breach this psychological support area, the GBPUSD is at heavy threat of sinking down the charts very suddenly.
Risks that traders should continue to monitor is if other senior influencers, or members of authority like London Mayor Boris Johnson publically throw their name into the hat for candidates that will vote for an exit. While Boris Johnson might not be the most popular citizen of the UK by any means, the market reaction to his unexpected statement does provide food for thought on how investors could react if similar comments are repeated by someone or a corporation that contributes significantly to the UK economy. I will also myself be heavily monitoring any threats of capital outflow, as well as other concerns that major enterprises could threaten to vacate UK operations if there was a Brexit. Ultimately, there is a wide range of different risks and investor sentiment towards the Pound is going to be pulled apart from a number of different directions over the upcoming months.
I would also keep an eye on BoE Governor Caney because he managed to create and encourage market anxiety by just expressing the view that the risks over Greece last year would have an impact on UK financial stability, which means that you only have to imagine his stance now that a date to the referendum has been confirmed.
Speaking of the BoE, Governor Carney and other members of the BoE just finished a testimony to the treasury committee where there were questions being asked about the possibility of UK interest rate rises. It needs to be made absolutely clear that the ongoing uncertainty over the UK’s economic future in the European Union is going to push back UK interest rate expectations even further, and this is regardless of the possibility of being kicked out of the door as far as possible for a prolonged period.
Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.