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British Pound Will Plunge Even Lower on Brexit Fears

British Pound Will Plunge Even Lower on Brexit Fears
(Paul Faith/AFP/Getty Images)

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Wednesday, 06 July 2016 09:05 AM Current | Bio | Archive


The British pound started the day sliding down to a new 30-year low of 1.2798, which also represents a post-Brexit decline of 14 percent.

In my opinion, the pound is in its third wave down that could reach its climax at around $1.25 per pound sterling, at which rate it could become attractive for accumulating for the long-term. Please take care, this is strictly my personal opinion and not an advice for buying.

Besides that, there is also something of a shift of focus to policy and policy reactions today.

The Bank of England Financial Policy Committee (FPC) announced the bank was reducing capital requirements for banks as it cut the what’s called “counter-cyclical capital buffer” to zero from 0.5 percent of risk-weighted assets.

Logically, this has caused weakness of the British pound.

Now, as a general rule of course, import prices do not react to currency moves, but commodity prices do generally react and the move of the scale of the current sterling weakness is likely to be passed through. That means higher food and fuel inflation, which consumers are disproportionately sensitive towards.

The fact that the increase in inflation comes after a period of negative inflation in food and fuel prices may make the damage somewhat more potent.

The just released BRC-Nielsen Shop Price Index shows overall shop deflation was -2 percent in June (data mainly collected before the referendum) and below the -1.8 percent decline in May.

Over in the U.S., Federal Reserve policy response is likely to come under scrutiny today with the release of the June FOMC meeting minutes.

Fed Chair Janet Yellen said at the June FOMC press conference when commenting about Brexit, “It is a decision that could have consequences for economic and financial conditions in global financial markets. If it does so, it could have consequences in turn for the U.S. economic outlook that would be a factor in deciding on the appropriate path of policy.”

In this context, New York Fed President William Dudley just stated the obvious about how the Fed could react to possible consequences of the Brexit: “If it’s confined just to the United Kingdom, it’s pretty small, but if there is broad contagion through financial markets, if it leads to greater questions about the stability of the European Union, then it could have more significant consequences.”

It’s certainly not an overstatement to say the Fed itself is on the horns of a dilemma, with on the one hand, the uncertainty caused by the UK referendum result, which is certainly a reason for caution, and on the other hand, the growing inflation problem in the United States would suggest that the Fed may be falling behind the curve in dealing with domestic inflation pressures.

The just released Dallas Fed Trimmed Mean PCE (personal consumption expenditure) inflation rate for May was at an annualized 1.9 percent and according to the U.S. Bureau of Economic Analysis (BEA), the overall PCE inflation rate for May was 2.0 percent, annualized, while the inflation rate for PCE excluding food and energy was 2.0 percent.

Inflation pressures are rising, and that could certainly harm the interests of lower income groups in society and risk alienating a group that has been left behind by the economic recovery.

Down under, in Australia they are still counting the votes, rather slowly, from the weekend’s federal election with no clear signal to whether a new government can be formed with a majority.

Beyond Australia, the precise details of the result probably matters less than the overall sense of the anti-establishment forces at work among the electorates of the OECD countries.

For investing, prudence remains the name of the game. Opportunities are coming, but they are not there yet, thanks to Brexit.

Nevertheless, as a long-term investor, please keep in mind, you should never invest in something you don’t like, or you don’t know, or because others do it.

Etienne "Hans" Parisis is a bank economist who has advised global billionaires and governments on the financial markets and international investments. To read more of his articles, GO HERE NOW.

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HansParisis
As a long-term investor, please keep in mind, you should never invest in something you don’t like, or you don’t know, or because others do it.
british, pound, brexit, currency
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2016-05-06
Wednesday, 06 July 2016 09:05 AM
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