British Pound End Of Year Outlook: Will The Crash Continue?

The United Kingdom’s decision to quit the European Union on June 23 set in motion the biggest ever plunge in the British pound. Nearly five months later, the pound has dropped more than 16% against the US dollar, at one point reaching its lowest level in 168 years.[1] The outlook might not be much better, as investors monitor progress toward a hard Brexit and higher US interest rates. Both developments might prove detrimental for the pound.

Pound sterling has staged a more than 300-pip recovery against the dollar this month after Britain’s High Court ruled that the government cannot begin the Brexit process without a vote from Parliament. The ruling deepened the United Kingdom’s division over EU membership and boosted the pro-EU camp’s morale about the future of Brexit negotiations. Without parliamentary approval, Prime Minister Theresa May could face roadblocks implementing a “hard Brexit.”

Britain has already said it will appeal the decision, with Prime Minister May confident of overturning the court ruling. So far, the Conservative government has given little away about its plans for UK-EU relations.

“While others seek to tie our negotiating hands, the government will get on with the job of delivering the decision of the British people,” May said in a statement earlier this month.

“It was MPs who overwhelmingly decided to put the decision in their hands. The result was clear. It was legitimate. MPs and peers who regret the referendum result need to accept what the people decided.”[2]

The outcome of the appeal will impact whether the Conservatives can trigger Article 50 of the Lisbon Treaty by the end of March as was previously planned. Article 50 is the mechanism that allows member states to withdraw from the EU. Therefore, the pound’s immediate outlook may depend on whether May’s original hard Brexit timeline could be established.

The British pound’s outlook also depends on the performance of the US dollar, which could strengthen significantly following the conclusion of the Federal Reserve’s two-day policy meeting on December 14. In its November statement, the Federal Open Market Committee (FOMC) said “the case for an increase in the federal funds rate has continued to strengthen,” potentially setting the stage for a December rate hike.[3]