Tragedy Strikes And The GBP/USD Pair Falters

Europe was in mourning after Belgium suffered the worst terror attack in its history with 34 people dead and dozens injured – some severely. However, the impact of the Brussels bomb blasts had far-reaching ramifications across the English Channel in the United Kingdom. The GBP plunged from 1.4398 down to its closing level of 1.4208 for a loss of 1.13% during the day. The reaction to the shock news from Belgium rocked currencies markets across the continent, with the GBP coming in for some serious tap. The year-to-date return for this currency pair is -3.58% – that’s how much the sterling has depreciated against the dollar. The day’s trading range was 1.4191 on the low end and 1.4398 on the high end.

Why the volatility with the GBP?

The terror attacks in Brussels generated mass hysteria on home soil and it quickly spread across the continent and through the UK financial sector. The United Kingdom is currently undergoing its own challenges vis-a-vis Prime Minister David Cameron’s war of words with the Mayor of London Boris Johnson and members of his own Cabinet. Other issues include the UK budget, and the shock resignation of Iain Duncan Smith. Combined, these matters have fused with other major concerns such as the upcoming referendum on a Brexit on June 23, 2016. Growing anxiety levels have resulted in the sterling losing strength in 2016. It is precisely this Euroscepticism, and mass speculation that is driving short-term currency weakness for the GBP.

At the heart of the issue are open borders in the UK with the rest of Europe. Since the United Kingdom does not subscribe to Schengen visa regulations, it requires all those visiting Britain to have passports or passport cards to move and travel through British immigration. However, Britain is subject to European Union immigration laws which state that any EU national can live, work and travel freely within all EU countries – including the United Kingdom. This presents Britain with unique security, social and economic challenges. The hawks in the Tory Cabinet and right-wing politicians have seized upon the terror attacks for their own ends. The immediate casualty is the GBP, and to a lesser degree the FTSE 100 index in the aftermath of the Belgian terror attacks. Traders have been shorting the GBP as rhetoric about a Brexit fills the airwaves. The likelihood of such a scenario occurring remains weak, but the chatter is driving speculators to place put options on the GBP/USD currency pair.