Partner Center Find a Broker

As it says in the title, the pound got a massive pounding in 2016. It wasn’t a one-way street, however, because like the yen’s price action, price action on the pound also had distinct phases or periods.

GBP/USD: Daily Chart
GBP/USD: Daily Chart

Early Slide

Many pound pairs started the year by sliding lower, apparently as an extension of 2015’s final phase. If y’all can no longer recall 2015’s year-end recap for the pound, the pound had what I referred to as “Der Untergang” (German for “The Downfall”) in the later part of 2015, thanks mainly to the BOE saying that it wasn’t so hawkish anymore, which fueled speculation that a 2016 rate hike would no longer be forthcoming.

And this theme apparently continued to play out into the new year, with the pound recovering a bit when BOE officials didn’t sound that dovish during the January 14 BOE statement, only to drop again when BOE Guv’nah Mark Carney said in a January 19 speech that “now is not yet the time to raise interest rates” and that “not enough cumulative progress has been made to warrant tightening policy.

And February only brought more headaches for pound bulls, since that’s when Brexit-related jitters began to show, especially after European Council President Donald Tusk finally replied to then British PM David Cameron’s November 15, 2015 letter. And it certainly didn’t help (well, it helped pound bears for sure) that economists, financial institutions, and media outlets began saying that Brexit is gonna be horrible for the U.K. economy.

Other important Brexit-related events during the month include Cameron’s announcement that the Brexit referendum will be on the 23rd of June, as well as London Mayor Boris Johnson’s unexpected switch to the “leave” camp, with the latter being the prime catalyst for the pound’s painful slump during the February 22-26 trading week.

Recovery Part 1

The pound had a more mixed performance in March before steadily yet broadly climbing higher in April, likely because the BOE maintained its hiking bias during the April 14 BOE statement, despite acknowledging the threat of Brexit. Specifically, the BOE said that ”The MPC’s best collective judgement is that it is more likely than not that Bank Rate will need to increase over the forecast period to ensure inflation returns to the target in a sustainable fashion.

May was also a good month for the pound, thanks mainly to Brexit-related polls consistently showing that the “remain” camp had an advantage over the “leave” camp. Although some polls were beginning to show that the “remain” and “leave” camps were neck and neck.

To see how these polls drove the pound’s price action, just check out Pip Diddy’s weekly recaps during the month of May, especially this one and this one.

The Brexit Referendum

Nigel Farage

Sentiment on the pound turned sour during the early days of June, thanks to some polls showing the “leave” camp finally having a narrow lead over the “remain” camp. The pound later recovered in mid-June, though, thanks to poll results swinging back in favor of the “remain” camp and the killing of anti-Brexit Labour MP Jo Cox, which caused both the “remain” and “leave” camps to temporarily suspend their campaigns just a few days before the Brexit referendum, easing Brexit-related jitters in the process. It also helped that economic reports at the time were net positive, with the June jobs report printing a jobless rate of 5.0%, which is the lowest reading in over ten years.

However, we now know that, contrary to what pundits were predicting and the polls were showing, the majority of British people voted for a Brexit, and so the pound plunged very hard as a result. Incidentally, June was the month in which all pound pairs suffered their biggest losses.

Range-Bound Period

Pound bears initially tried to push the pound lower in July, but got beaten back when uncertainty eased by a lot, thanks to Theresa May’s rise to power as the new British Prime Minister. And more bulls piled on (or bears were scared away) after the BOE decided to stand pat amidst heavy speculation that the BOE would cut in the aftermath of the Brexit referendum.

The BOE did warn that MPC members “expect monetary policy to be loosened in August,“ though. And that warning got turned into action during the August 4 BOE statement when the BOE slashed the official bank rate from 0.50% to 0.25% and revived its QE program while saying that “a majority of members expect to support a further cut in Bank Rate to its effective lower bound at one of the MPC’s forthcoming meetings during the course of the year” should economic conditions in the U.K. deteriorate.

And so, the pound slumped hard during the first half of the month as a result, only to rally during the later half of the month when the U.K. later printed an increase for its July CPI reading and a very large increase for its July retail sales reading, since the economic reports showed that the U.K. economy was still doing A-okay after the Brexit referendum, contrary to predictions by economists.

The pound then rallied further at the start of September, thanks to a rebound in PMI numbers, which once again went against the prediction by economists. Pound bulls were later turned into roast beef, when poor manufacturing output  and housing data weighed down on the pound, together with BOE Guv’nah Mark Carney’s September 7 testimony before the Treasury Committee where he said that the BOE will take “whatever action is needed” to support the U.K. economy. The pound then got swamped with ever more bearish pressure after the BOE repeated its warning that “a majority of members expected to support a further cut in Bank Rate” if economic conditions deteriorate.

Late Slide & “Flash Crash”

Renewed Brexit-related jitters kicked the pound lower come October, thanks to Theresa May’s announcement that she would be triggering Article 50 of the TEU by March 2017 in order to start the formal process for an actual Brexit. However, most people probably only remember the mysterious so-called “flash crash” on October 7. The BOE itself has said that there was no fundamental trigger and arguments are still going back and forth on what really triggered that weird drop, but it has now emerged that CitiGroup’s Japanese trading floor may have exacerbated the drop.

Anyhow, the pound later stabilized and even started winning out against some of its rivals, thanks to a slew of positive economic data, which once again showed that the U.K. economy is still doing A-okay.

Recovery Part 2

The pound extended its recovery in November, thanks initially to another round of net positive PMI number, the U.K. High Court’s ruling against Brexit, which fueled speculation that Brexit would be delayed, and the BOE’s blatant switch from an easing bias to a neutral one during the November 3 BOE statement. According to the BOE, “Monetary policy could respond, in either direction, to changes to the economic outlook as they unfolded to ensure a sustainable return of inflation to the 2% target.”

However, the bullish party really started after Trump emerged as the President-Elect of the United States, thanks to an emerging narrative that Brexit and Trump’s victory are signs that anti-establishment movements are gaining ground, which made investors worry over the upcoming elections in continental Europe. As such, bearish pressure on the pound abated, as market players turned shifted their attention to uncertainty in the Euro Zone. Heck, the pound even managed to win out against the Greenback during the November 7-11 trading week, making it the prime beneficiary of Trump’s victory, interestingly enough.

After that, focused shifted back mainly to Brexit-related news, with the pound falling on negative news, such as top E.U. Brexit negotiator Guy Verhofstadt’s statement that he’s gonna give the U.K. a hard time in negotiating a deal. On the flipside, the pound rose whenever there was positive news such as Brexit Secretary David Davis saying that the U.K. government is open to paying for access to the E.U.’s single market.

The pound later began dipping across the board, though. And one of the major drivers for this appears to be the December BOE statement, since the chance for a switch to a hiking bias now seems lower after the BOE warned that “Some slowing in activity was therefore in prospect during 2017” and that “The sterling exchange rate had appreciated and this would by itself point to less of an overshoot in inflation relative to the target in the medium term.” Less of an overshoot and inflation and a possible growth slowdown in 2017 means lower chance for a rate hike.

Overall Performance

Pound's Performance as of December 22, 2016
Pound’s Performance as of December 22, 2016

The pound was hands down THE worst-performing currency of the year. Nothing even comes close. And the pound’s losses were primarily due to the Brexit referendum, as well as negative Brexit-related news.

Another major driver for the pound’s price action this year was the BOE’s monetary policy stance, with the BOE’s not-so-hawkish stance weighing down on the pound when the trading year began. Conversely, the pound got some support after the BOE switched to a more neutral stance in November.

Trump’s victory also helped the pound to recover in November, thanks to easing pressure from Brexit-related uncertainty, as market players focused their gaze on continental Europe instead. And finally, economic reports mainly came into play after the Brexit referendum, as market players tried to gauge how the referendum has impacted the U.K. economy.

Looking forward, chances are very good that we’re gonna see a lot of pound volatility in 2017, given the possibility that Brexit negotiations may start in 2017 (and all the entertaining drama that will likely bring). Also, market players will likely be keeping a close eye on how the U.K.’s economic indicators, as well as the BOE’s monetary policy stance, will evolve. Moreover, the upcoming elections in continental Europe will probably continue to have an effect on the pound. We therefore have plenty of potential catalysts for the pound in the coming year.

See also:

A Monthly Review of 2016’s Trading Themes

The Yen’s Tale: Conquests and Retreat (2016 Edition)

 

These are some of our favorite trading books if you want to get in deeper with macro economics & trading psychology. BabyPips.com receives a small credit from any purchases through the Amazon links above to help support the free content and features of our site…enjoy!