Fundamental Forecast for GBP: Bearish

As we came into this week, there were very legitimate bullish prospects for the British Pound, and this wasn’t necessarily a new story. Ahead of Brexit, Bank of England Governor, Mark Carney, warned that the British Pound could undergo a ‘sharp repricing’ should U.K. voters elect to leave the EU. He also warned that this could be coupled with a whole host of unsavory elements; such as slower growth and higher unemployment. Meanwhile, the ‘sharp repricing’ in the value of the British Pound could lead to unsavory levels of inflation; and this could put the bank in the unenviable position of having to choose whether to mold monetary policy to either a) support the British Pound, which could stem inflation while risking even higher levels of unemployment and even slower levels of growth, or b) support growth and employment by cutting interest rates, which could drive even more weakness into GBP, which could expose even stronger inflationary forces.

It wasn’t more than a week after the Brexit referendum that the Bank of England showed their hand. In response to the flurry of the incalculable risks that could come about, the BoE instituted uber-dovish monetary policy in the effort of supporting growth in the British economy. In August of last year, the Bank of England launched a ‘bazooka’ of stimulus that involved buying a significant chunk of the economy’s corporate debt market. This further depressed interest rates, and the British Pound followed. Given that there was little hope for any hawkish outlays from the BoE, as they had made their dovish stance rather clear, there was an absolute dearth of demand for the British currency. This led to the ‘flash crash’ in October as the pair tested the 1.2000 level in thin Friday trade after October NFP’s.