What Factors Are Driving The GBP/USD Currency Pair?

GBP 2016

One of the world’s most popular currency pairs is the GBP/USD. The greenback has been in an enviable situation of late given that Brexit anxieties (and strong US economic performance) have worked against the pound and in favour of the dollar. This is abundantly clear in the sharp appreciation of the US dollar against the sterling from the above chart. From levels of approximately 1.58000 to its current level of 1.41840, the dollar is clearly in the ascendancy. Market volatility around the June 23 referendum in the UK appears to be growing by the day.

A Brexit has serious, and far-reaching, economic, political and social ramifications for the United Kingdom, continental Europe and global trade. It’s not merely an issue of Britain leaving the European Union. There are many peripheral issues to consider, none of which are easy to deal with and every one of which presents a legal nightmare of the worst kind. It is expected that a no vote would yield nothing less than cataclysm for the unity of the EU. What would Britain’s trade agreements with European nations look like? Would Britain be able to enjoy the collective bargaining power of the European Union? What about the free movement of migrants from Europe to the United Kingdom? What about the legal status of migrants already in the United Kingdom? There are more questions than a yes/no vote can deal with, and it is precisely this anxiety that has filtered through to the GBP/USD currency pair. Pervasive weakness is the long-term trend – at least until June 23, 2016.

UK FRIENDS

However, there are many more factors playing into the value of this currency pair than meets the eye. These include the following elements:

The March 16 interest-rate decision by the Federal Reserve Bank. If the Fed decides to maintain interest rates at their current level of 0.50% it will send a clear message to the world that the global economy is unstable and that the US perceives it to be that way. The FOMC economic projections released after the announcement is made will be carefully scrutinised for minor nuances as to the scope and timing of the next possible rate hike. While the general opinion is that a March rate hike is off the cards, there is still a week’s worth of economic data to be evaluated before any consensus can be reached. Suffice it to say, no rate hike would be better for the GBP/USD pair, while a rate hike would strengthen the USD and weaken the GBP/USD pair.