Fortress Capital (by JoeGelet), 2016
GBP has sold off more after Brexit vote, and rumors it will go further.
Will GBP continue to slide, or is this a buying opportunity?
GBP can probably sell off a little more – but not below 1.25.
GBP should retrace, as all currencies usually do after a downturn.
A GBP recovery should be in the cards in the near future.
Brexit has come and passed, now what is to be the fate of the Great British Pound? (NYSEARCA:GBB) Look at the chart of the ETF:
GBB data by YCharts
Wow – this looks like a death spiral. It seems as if it will go to zero, like a public company that has unpayable debts and will finally close. But this is FX, not stocks – it’s impossible the GBP will go to zero. In fact, historically speaking, currencies usually recover. Even during periods where currencies trend for a long time, if a currency has a sharp move in one direction, it’s likely followed by a partial retracement. Almost always, currencies retrace.
Now, considering that Brexit is a unique situation, and more of a macro / fundamental move – a retracement can take time. And like any trader who tries to guess the retracement, the first necessary point is to establish a bottom – which the Great British Pound hasn’t done yet. It’s still sliding.
How low can it go? Probably not below 1.25, certainly not below 1.20 – but this is FX, anything is possible.
Chances of U.K. slipping into a recession are higher ahead due to weaker terms of trade and a likely flight of investments on uncertain economic policies. The likes of Goldman Sachs has forecast that the U.K. economy will likely see a “mild recession” by early 2017. Investors should note that the possibility of a slowdown in the economy may lead Bank of England to cut interest rates, leaving no scope for pound outperformance or stabilization in the near term. Definitely, the pound ETF is not a Buy at the current level. But investors having a strong stomach for risk may tap it with a long-term view. After all, all the downside movement in the fund will be capped in fast, in fact over the next few sessions, as investors are hurrying to price in the looming risk in pound. With this, the currency and the related fund may bottom out soon and give way to a reversal.