British Pound Sterling Falters Following Islamic Terror Attack in Brussels

Witawat (Ed) Wijaranakula, Ph.D.
Tue Mar 22, 2016

The GBP/EUR currency pair took a 0.84% nosedive on Tuesday, to close at 1.2674 euros per pound, following the terrorist bombings at the Brussels airport and Metro station that left at least 34 people dead and scores injured. The Islamic State, or ISIS, terrorist group claimed responsibility for the explosions. Nigel Farage, leader of the pro-Brexit, anti-immigration United Kingdom Independence Party, blamed the blasts on the EU's freedom of movement rules and accused Britain's pro-EU politicians of “putting lives at risk for the sake of political union”. He also suggested the attacks could strengthen the campaign for Britain to leave the EU in the U.K. referendum, to be held on June 23.

U.K. Prime Minister David Cameron announced the referendum, to be held on June 23, on whether Britain should exit, or stay in, the EU. The referendum has been a hot-button issue after the Conservative Party won a majority of seats in the House of Commons in the May 2015 general election, as David Cameron reiterated his party's manifesto commitment to hold a referendum on whether Britain should remain in the European Union by the end of 2017.

Tuesday’s drop came on the heels of a 0.53% decline on Monday, following the late Friday resignation of Work and Pensions Secretary Iain Duncan Smith who cited the “deeply unfair” government tax and welfare changes as his reason for quitting. According to CNBC, the reason for Duncan Smith’s resignation could be solely about the referendum vote. Some political commentators suggested that Duncan Smith, one of a number of senior Conservatives supporting the “Leave” campaign, is using the budget to cause a damaging split in the party.

Since September 2015, the British pound sterling has been struggling against the U.S. dollar as downside risks for U.K. economic growth has increased from the slowing Chinese economy, as well as from other emerging countries. Britain’s overall trade deficit in goods and services has widened, while U.K. factory output fell. The Office for National Statistics (ONS) said in early March that the U.K. trade deficit narrowed in January, but its goods trade gap with the EU widened to a record level, according to the BBC.

The British pound sterling got some support during the past several weeks, as most currency traders were speculating that the Fed would push a second rate hike out to July or later. As expected, the U.S. Federal Reserve kept the rate unchanged at between 0.25% and 0.5% at its March FOMC meeting, and hinted that they may make only two rate increases by the end of the year, half the number that was forecasted at its December meeting. The Fed trimmed its economic growth outlook for the year to 2.2%, from the previous forecast of 2.4% growth, and its forecast for inflation to 1.2% from 1.6%. 

The Bank of England (BOE) might have followed the Fed’s move, as last week, all nine members of the Bank's Monetary Policy Committee (MPC) voted to keep rates at the record low 0.5%, for the seventh year. Late last year, BOE Governor Mark Carney told the members of parliament on the Treasury Committee that U.K. interest rates are likely to remain low "for some time". Mr. Carney, however, reiterated his long-term view at that time that the Bank's next move might actually be a rate hike.

The British pound sterling has been under selling pressure against the euro, despite that the European Central Bank (ECB) announced earlier in March, at the Governing Council meeting in Frankfurt, that the central bank raised monthly asset buys to 80 billion euros, from 60 billion euros, and cut its main refinancing rate to zero from 0.05%. The above-expectations QE came with a negative spin though, as ECB President Mario Draghi said after the ECB monetary policy meeting that the central bank doesn't anticipate that it will be necessary to reduce rates further.

From our technical viewpoint, the GBP/EUR just broke down the descending wedge chart pattern and is bumping along the trendline support at around the 1.268 euros per pound level. The downtrend could linger, as the long-term sentiment for the British pound sterling is bearish while the referendum and U.K. politics continue to be a dark cloud throughout the first-half of 2016. The next key technical supports are 1.255 euros per pound, or the 61.8% Fibonacci retracement level, and 1.243 euros per pound, respectively.


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