The Daily Reckoning UK

Outlook For The Pound In 2016 And Beyond

Tom Tragett

by

Posted 21st July 2016

As I expected, following a vote to leave the EU, the pound saw a significant move lower of over 2,000 pips against the US dollar.

The question on everyone’s lips right now is…

Will it recover?

My simple answer:

No.

Sorry, but according to my analysis, in the long term it looks like the pound is more likely to go further down than back up.

Where the pound is right now is a bearish level.

The real question is how long will the price hover around this level. Because the longer it does, the more traders and commentators will get worried about its long-term direction.

From an analytical point of view, ideally it would be much clearer if the price were to continue to move further away from this area in the short term and closer to the $1.25 mark.

That would clear up any doubts about a move lower.

The fact that it hasn’t fallen further yet is down to several factors. We’ll look at them below.

Waiting for the floodgates to open

Above all else, we have to remember that the pound was trading over 2,000 points higher from its most recent lows just four weeks ago.

That’s not long for such a huge move to sink in. People are still in shock.

On top of that, it’s worth remembering that while the vote has been cast, there’s still no confirmed plan for exit and the Bank of England (BoE) hasn’t really done anything about Brexit yet.

Sure, the BoE threatened to do something just after the outcome with Carney sending a clear signal that he and his cronies would act to relax monetary conditions if need be.

Ironically, it was this prospect that really sent the pound scurrying to its lowest level since 1985. Well done, Mark.

However, since then the price has attempted to rally back towards $1.35. This is in large part due to a rather tenuous selection of ‘good’ news: a new PM, the BoE holding off lowering rates.

Personally, Carney’s apparent flip-flop over cutting rates worries me. I wouldn’t doubt his integrity but I would certainly question whether he ultimately knows what he’s doing.

But there’s no doubting these two events have helped steady the ship.

But the ship has ONLY been steadied. It did NOT rise back above the bearish neckline I talked about yesterday – that $1.35 level.

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Where next?

The consensus among ‘experts’ is for the GBPUSD to be around $1.27 by the end of the year.

I think directionally that’s entirely right. But I think they are all rather conservative in their outlook.

Personally, I’m looking for a deeper decline by the end of the year… towards the $1.10-$1.15 region.

And, perhaps more shockingly, I see that trend continuing into 2017, when I think we’ll see a move towards parity (£1 being equal to $1) and perhaps a dip briefly below that level before any meaningful bounce ensues.

Indeed, that bounce may even lead us back for another test of the neckline over the following year – we shall have to see about that in due course. I’m not looking that far forward just yet.

Of course, this analysis is based on such a long cycle that we shouldn’t be surprised if it takes years rather than months – but it’s a move I do believe we’ll see.

Good news or bad news?

Now, whilst I think that the prospects for the UK are perhaps not a dreary as some point out, I am not particularly optimistic for any region right now, if I am brutally honest.

Although I am not usually a ‘glass half empty’ man, I am concerned in the wider context of what is still not exactly an encouraging global rebound.

Perhaps in a different cycle the UK would have been better placed to withstand the shock to the system that a Brexit will most likely produce. I this sense, I do think the timing is particularly poor.

I also think that the timing is poor in the context of where the UK property market is currently placed. That in itself should be a worry for many overseas investors who currently have their vaults stuffed with very expensive UK property deeds.

I have made no secret of these concerns for months before the Brexit vote played out. I feel we could be at the start of what could be a vicious downward spiral for the UK property market.

The optimists tell us not to worry because the lower the pound goes, the more attractive UK assets will become to overseas investors.

Sure, that might be true where those investors see value and growth opportunity, perhaps in the corporate sector, but it won’t necessarily mean that UK property will continue to be the haven for those hot foreign money flows.

Look, these investors are often easily spooked and just like everyone else if they think the game is up then they will just as easily keep their hands in the pockets.

It might just be the case in the months and years ahead that the UK has to keep the pound low in order to continue to try and make the UK an attractive destination for that overseas capital.

Of course, the powers that be won’t hold their hands up to such a policy, but I bet in secret that’s already an angle they’re looking at pursuing over the coming years.

After all, we have set sail on the high seas and now that we are truly adrift we need to take our chances where they come. In such a world a lower exchange rate is just what many are after.

Inadvertently the UK just won the first round of the 2016 currency war, but retaining the yellow jersey is going to be key for our future survival.

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