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Video: How the BoE Could Revive the Pound, GBPUSD Next Week

Video: How the BoE Could Revive the Pound, GBPUSD Next Week

2016-07-30 00:00:00
John Kicklighter, Chief Strategist
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Talking Points:

  • The Brexit vote on June 23/24 represents a 'permanent' weight on the Pound and global appeal of UK assets
  • If fundamentals materially improved or the risks of 'fallout' dissipated sharply, the Sterling could rise materially
  • After holding at its July meeting, this weekly BoE rate decision and Quarterly report will be critical

See the DailyFX Analysts' 3Q forecasts for the Pound, Dollar, Euro, Equities and Gold in the DailyFX Trading Guides page.

The Brexit left a permanent scar on the British Pound as well as the outlook for the UK economy and financial system. Since the vote to split from the EU was clear, GBPUSD has not been able to move back above 1.3500 and instead flounders near multi-decade lows. This remarkable fundamental event warrants the significant depreciation in the currency; however, it doesn't necessarily present a permanent burden for the currency and the UK capital markets. If circumstances change, a significant fundamental weight would be lifted; and the market opportunity can be substantial.

Heading into the EU Referendum, the Bank of England (BoE) and a number of international groups warned of the dire economic and financial consequences that could accompany a decision by UK to break away from the EU. When the vote was realized, the warnings of recession, diminished trade opportunities and financial retreat resulted in the currency and capital market plunge witnessed immediately after the vote was counted. The technical implementation of the Brexit will be long and complex, so uncertainty is warranted. Yet, the dire assessment of its implications are not definitive. The early data that we have seen since the B-day hasn't been as devastating as was fretted. And, the more data that crosses the wires without the hallmark of economic malaise, the less burdened the future looks.

There are a number of timely indicators scheduled for release over the coming week, but clearly the most decisive event risk for deciding the Sterling's fundamental course will be the BoE's rate decision. An assumption of rate cuts and the revival of the long-dormant stimulus program were priced in since June 24th. When the July 14th meeting ended with a wait-and-see assessment and nothing more, the prospects for the Pound improved. The assumption was that support was still on the way just at the next meeting. And, in a sign of the times where the ECB and BoJ are going all-in, the expectations were set at a remarkable scale. If the BoE rejects this speculation with no change or a reserved effort, a significant weight will be lifted from the Pound. Should that be paired with a more restrained assessment of the post-Brexit economic pain, it could set the currency on strong course to retrace a significant portion of its June losses. We discuss this particular asymmetrical scenario in this weekend Strategy Video.

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