GBP/USD At The Lowest Since Mid-January – 3 Reasons

Pound/dollar is trading at 1.2207, the lowest level since January 17th. At that time, the US dollar was at its strongest and Theresa May laid out her Hard Brexit vision.

The pair was trading at the 1.24 handle and a bit around this level for a few weeks but has deteriorated to lower ground. What is behind the fall?

Fed hawkishness: The US dollar strengthened across the board as the Federal Reserve made a concerted effort to tell us that they are going to raise rates in March. Markets had not priced this beforehand, but comments from Williams, Dudley, Fischer, Brainard and finally Yellen made clear everybody got the memo. In fact, when Yellen spoke, the dollar was already ready to correct. GBP/USD was not indifferent to this greenback rally.

Messy Brexit: While markets did not like the Brexit move, a Conservative government with an absolute majority in parliament is what markets want to see as guiding the country to an orderly divorce from the EU. However, things are becoming a bit messier. The Brexit Bill that was easily approved in the House of Commons was sent back from the House of Lords with a critical amendment. The unelected Lords want to secure the rights of EU citizens living in the UK, a very sensitive issue. This could delay the triggering of Article 50 and complicate things for the government. It also shows us that Brexit will be messier than thought. This is not supportive of the pound.

Worries about the British economy: The UK economy seemed to have ignored the EU Referendum. Following the June 23rd vote, the UK economy grew at a solid pace in both Q3 and Q4. Employment remains high and even investment looks good. Leave supporters are rejoiced and Remain supporters seem to have lost the economic argument. However, the weakness of the pound is felt in consumers’ pockets. Official retail sales disappointed in both December and January. Another measure, by BRC, also showed a drop: 0.4% y/y in like-for-like stores in February. The British Retail Consortium reports that consumers are cutting back on non-essential Brexit as a result of Brexit. A separate survey by Barclaycard shows more spending on essential goods but a cut back on non-essential ones.