Brexit vote one year on and GBP still in limbo
One year on from the UK’s vote to leave the EU, much has changed, but a lot has stayed the same, not least the chronic uncertainty overhanging just about every aspect of the country and GBP.
That uncertainty is now worse than ever thanks to the inconclusive result of the general election earlier this month leading to a hung parliament. Arguably, the British political establishment is still unable to cope with the results of the referendum, which came as a complete surprise to it.
Following the election result, which also came as a shock, it is now even more weakened as it attempts to negotiate a favourable new relationship with the EU. Some think this may pave way to a softer Brexit – but maybe not as it is now easier for the EU to foist a ‘take it or leave it’ deal on a divided and indecisive UK with terms designed to dissuade other countries from leaving the club or even persuade the UK to stay.
After all the EU seems more prepared to take on the economic pain of separation and is far more concerned about its own survival than the welfare of its people. It also needs frequent crises, economic or political, to drive its integration agenda, which is exactly what it is doing following the Brexit referendum result.
And now the UK economy, which had performed against post-Brexit expectations, has moved into a slow patch as consumer purchasing power is eroded by inflation. Higher exports may help a bit, but overall, they comprise a much smaller part of the economy than domestic consumption.
The lack of firm political leadership and an inspiring vision to take the country forward is deeply worrying and as this column noted a few weeks back, the outlook for GBP has darkened. Indeed, this column does believe that Brexit could be a success providing the government can provide stable and strong leadership and deliver on a positive vision for the future.
But there is a small chance that GBP could anyway rise in the coming months.
Brexit likely wasn’t the main concern for UK voters during the general election. Several polls put it behind issues such as the National Health Service and the economy. This suggests the government will be forced to loosen the purse strings and deliver a fiscal stimulus that could lift economic growth.
Faster growth could sustain inflation leading to the Bank of England to tighten monetary policy and clearly policy makers are already divided over raising interest rates. BoE governor Mark Carney said now is not the time to raise them as the UK prepares to leave the EU, but was swiftly contradicted the next day by BoE chief economist Andy Haldane, who said he may vote for a hike later this year.
Tighter monetary policy and support for GBP would help keep consumer prices under control, but this scenario does have a few problems. Will investors be prepared to overlook the UK’s large fiscal and current account deficits and buy GBP and UK government bonds? Or will they be distracted by continued political instability and the likely messy divorce proceedings with the EU?
TECHNICAL ANALYSIS: GBP/USD: Building towards further weakness
From the technicals the outlook for GBP still looks bearish. GBP/USD have not recovered from the June 8 election result and after forming a consolidation pattern after that fall, further weakness looks likely.
Since the election result there have been a several lower lows, whilst upside attempts above 1.2829 have failed to build momentum. From the chart pattern, it looks as is GBP/USD could start moving lower again this week, particularly if resistance around 1.2829 holds.
If the downside is to be limited, it is particularly important that support at 1.2565-7 holds. Another factor that could limit the downside is that the pair are quite close to the 200-day moving average (turquoise line) and that can often prove to be a strong support level.
Resistance 1.2755, 1.2814-5 and 1.2912. Support: 1.2628-9, 1.2589, 1.2565-7 and 1.2557
By Justin Pugsley, Markets Analyst MahiFX