The UK's decision to leave the EU has put pressure on GBPUSD exchange rates, how will the month's ahead running up to the US election pan out?
Since the UK decided to leave the EU cable (GBPUSD) exchange rates have fallen 10% and to the lowest levels since 1985. As you would expect the majority of the losses were recorded when the UK public voted in favour of a leaving the EU and I expect exchange rates to continue to fall for the remainder of 2016. Below are four key points which formulate my theory:
- The UK are set to cut their interest rates today by 0.25bps and when a central bank cuts its interest rate the norm is for the currency to devalue. Further to this the Bank of England could add additional Quantitative easing to the economy which again should weaken the pound.
- To begin the process of leaving the EU Theresa May must invoke Article 50 of the Lisbon Treaty. The PM has exclaimed this will take place towards the end of 2016 however former PM David Cameron stated he would invoke Article 50 the day of the referendum result if the UK left the EU. This never happened therefore I don’t have complete trust in the PM or politicians in general. The questions I have, before Article 50 is actually invoked could there be further negotiations which lead to a second referendum or will Theresa May keep to her word? Either way the uncertainty should cause sterling weakness.
- Post referendum economic data has shown signs of a sharp economic slowdown. Markit’s UK PMI data in particular from the manufacturing sector showed a drop to its lowest level since February 2013. Chris Williamson, chief economist at Markit exclaimed ‘July saw a dramatic deterioration in the economy, with business activity slumping at the fastest rate since the height of the global financial crisis in early 2009.’ To me this shows another recession is just around the corner.
- Economic data from the US has been showing signs of strength and as long as Donald Trump does not become President I believe the US will raise interest rates in December.
Friday the US are set to release their latest Non-Farm payroll (number of jobs created in non-agricultural businesses) and unemployment numbers (unemployed workers divided by the total civilian workforce). Last month Non-Farm numbers exceeded expectation at 287K and unsurprisingly we are expecting a drop this month. The consensus if for 180K jobs to be created however any alteration from this figure will cause US dollar volatility. As for the Unemployment rates a small drop is expected which should provide support for the dollar.
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