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What Would Drive GBP/USD to Parity or Back to 1.3000?

What Would Drive GBP/USD to Parity or Back to 1.3000?

2016-10-19 01:47:00
John Kicklighter, Chief Strategist
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Talking Points:

  • After the massive 15 percent drop from GBP/USD following the June 24th Brexit fallout, the risk seemed discounted
  • Yet, another 11.5 percent drop in the month through October 7th to new three decade lows shows there is still risk
  • Monetary policy, economic data and negotiation risks don't represent equal opportunity drivers for major Pound trend

See what live coverage is scheduled to cover key event risk for the FX and capital markets on the DailyFX Webinar Calendar.

GBP/USD has dropped to fresh multi-decade lows this month and done so in dramatic fashion. In the aftermath of the remarkable collapse post Brexit vote, it would seem that this scale of risk and momentum would have already been accounted for. That is clearly not the case. Two months ago, I posited that much of the immediate risk associated to the UK's divorce from the EU had been accounted for in that remarkable adjustment and time would see the Pound firm up and recover lost ground - much like the Euro did in the midst of the Euro-area financial crisis. That view did not account for important elements of what still lies ahead.

The Brexit fallout is broad and vague. The ultimate economic and financial impact may be vastly greater than what is being accounted for or it could be materially smaller than what the initial drop even insinuates. Either way, we will now know the full scope until well after the fact. What's more, we don't even have definitive milestone for gauging its influence until Prime Minister May invokes Article 50 to being the proceedings - scheduled for some time in March 2017. In the meantime, we simply have to go by the ancillary data, surveys and political rhetoric that is offered to shape expectations. But there is a clear order of importance when it comes to moving the Pound. And there is certainly a clear priority as to the data that can move a pair like GBP/USD beyond key levels like 1.3500 or below 1.1000.

Rate expectations and the BoE's efforts to offer buffer do not measure up to much. The stimulus efforts to this point are not greater than the ECB or BoJ's, and the contrast to the Fed is already wide enough. This past session's CPI data did little to motivate a meaningful change in the Pound's progress. Meanwhile, data and surveys have been crossing the wires for months - both good and bad data - but they have not driven the strong drives that we've seen over the past two weeks. What truly matters is something that definitely alters the expectations of the negotiations. PM May's prioritization for immigration over single market access or French President Hollande's remarks about ensuring others don't leave the EU is the kind of spark that can truly change the scales. We discuss what has the capacity to define the next Pound trend in today's Strategy Video.

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