GBP/USD: the pound remains a clear concern - Scotiabank

Analysts at Scotiabank explained that the pound (GBP) remains a clear concern for FX investors.

Key Quotes:

"The GBP underperformed in Q2 on the Brexit referendum outcome and was the weakest G-10 currency in Q3 as investors considered the implications of the decision.

Q4 has started inauspiciously for the GBP, with U.K. government adopting an aggressive position on Brexit negotiations and the GBP/USD suffering a “flash crash” early in October as the market broke under 1.25 in thin, Asian trading, driving the pound more than 6% lower in a matter of minutes before it stabilized.

Extended weakness reflects the GBP pattern of adjustment to previous domestic shocks (down 25% following the 2008 financial crisis and down 20% following its Exchange Rate Mechanism exit in 1992).

More losses look likely as investors consider the risks and consequences of a no-compromise, so-called “hard Brexit” on the economy. The Bank of England, meanwhile, does not appear overly concerned by the GBP’s plight and may only attempt to stabilize the exchange rate in the event of markets turning disorderly (for more than a few minutes) or if domestic inflationary pressures rise as a result of the weak exchange rate. We have lowered our GBP/USD target to 1.20 for early 2017 but feel “overshoot” risks remain significant as investors await the UK government’s decision to formally start the EU exit process."