In what appears to be an ongoing and losing battle, the strength of the Great British Pound against the US Dollar is waning, and quickly. Losing over 5.5% of its value since mid-May, the GBPUSD pair, or ‘cable’ as it is referred to, hit a level last week that had not been seen since April 2017 (chart 1). Unsurprisingly, the catalyst which caused cable to move down to its current level was the very same issue that has moved the pair lower for over three years; Brexit, of course. And with a leadership contest in a Conservative Party seeking to distance itself from the failures of Theresa May, a No-Deal Brexit is appearing to grow in probability.

Chart 1: GBPUSD reaches 2.5yr Lows

Source: Bloomberg

Cable’s low last week, approximately 1.2447, could be considered terra incognita for the pair when looking through the lens of recent history. Further into the past, during the six-month period from October 2016 to April 2017, cable experienced 3 roughly one-month periods closing below this 1.2447 mark (chart 2). The absolute lowest intraday level it grazed during this time, which was 1.1905, was in the midst of a 6% ‘sterling flash-crash’ on October 7th, 2016, the cause of which still remains some bit of a mystery. However, that brief move lower swiftly recovered back into the 1.24’s, possibly due in part to the crash being algorithmic-trading induced. The lowest meaningful level for cable during this time was a close at 1.2044 on the 16th of January 2017. Aside from the period of October ’16 to March ’17, in order to find GBPUSD trading below the 1.20/1.25 range, we would have to look all the way back to 1985! Even so, the dip to the all-time low of 1.05 in ’85 preceded a recovery to the 1.40’s over the following 4 quarters (chart 3).

Chart 2: Six-month period hovering below 1.2465

Source: Bloomberg

Chart 2: Six-month period hovering below 1.2465

Source: Bloomberg

With the Bank of England Governor Carney recently acknowledging the rising Brexit concerns, and moving the near-term economic growth forecast to zero, it is hard to imagine a large demand for the pound to build up during Q3 2019.  Regardless of whether the UK’s next Prime Minister can manage a deal with the EU or it comes crashing out, putting Brexit in the rear-view mirror will likely be a relief for most investors into Britain. However, there is a chance that the UK has depressed its economic activity (with Brexit) just as the rest of the world has been basking in the final years of an artificially extended global expansion. If trade tensions and fleeting political relations make good in pressing the world into the next (and well, well overdue) economic correction phase over the coming quarters, the worst may be yet to come for the UK economy.

Few, if any, would expect the GBP to act as the safe haven currency it once was in the first half of the 20th century. The fact is that the USD remains the world’s reserve currency, having overtaken GBP in the 1950’s with help from the Bretton Woods Agreement. But given current economic circumstances, further capital flight from the UK would put pressure on GBPUSD that may, in fact, push past any low seen on the charts above. The Bank of England still has some monetary tools at its disposal with a current policy rate of 0.75%, however, these tools are only finite and temporary. The prevailing interest rate environment and outlook has helped support some demand for GBP from central banks as a funding currency, but the growing incentive is to ‘sell sterling forward’. The UK is inevitably up for an economic fight against disinflation, unemployment and stunted growth in the long run. £ for £, the UK may end up punching below its weight.

Author: Caleb Thibodeau