The Recent Pound Rally: Just an Illusion?

The Recent Pound Rally: Just an Illusion?
July 18, 2016 Market Traders Institute

 

Since falling off a cliff the day after the Brexit vote, the pound has nicely rebounded and is trading higher than the experts thoughts.

 

But this rally isn’t sustainable according to some.  British economists are expecting the pound to fall by the time 2017 hits.

 

“There will still be a lot of uncertainty into 2017, especially about what’s going to happen about investment, what’s going to happen about the banking sector,” said Kristian Schmidt, a currency analyst in Silkeborg, Denmark.

 

As of right now, after a post-Brexit rally, the GBP is worth $1.32 (American).  British bankers, however, are predicting that figure to fall to slightly less than $1.27, which would be a 30-year record low.

 

It’s still too early to tell the true state of the British economy post-Brexit, but analysts are looking at the August 16th inflation figure announcement as a good start.

 

Mid-August is also around the time the Bank of England is expected to make another interest rate announcement.  They BOE decided against an interest rate change for the month of July last week.

 

The grim predictions of the pound aren’t limited to the EU either, banks in the US are reporting bearish outlooks for the pound.

 

Goldman Sachs and HSBC are predicting the pound to trade at only $1.20, and UK-based Standard Chartered Plc. is predicting an even-lower $1.18.

 

The closest thing economists have to the Brexit is the September 1992 crash in the UK where the pound dropped 4 percent overnight. And as alarming as that number sounds, it’s only half of what happened the night after Brexit.  After Brexit, the pound dropped by 8 percent.

 

In 1992, the pound lost a whole bunch (like it did in June), then rallied (like it’s doing now), and ended up losing around 20 percent before it stabilized.

 

It’s not a guarantee that this is what’s going to happen right now, but it’s the closest parallel we have.  As the head of one major bank says, “The recovery belies the plunge in ’92 that took place.  “I wouldn’t say it’s a parallel — but I’d say it’s a warning.”

 

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