Bank of England (BoE) Governor Mark Carney made a speech on Thursday indicating that the central bank is likely to cut interest rates within the coming months in reaction to last week’s Brexit outcome that saw the UK vote to leave the European Union. Carney stressed that while the results of the referendum have been made clear, the full implications of a Brexit on the UK’s economy have not yet.
Carney spoke earlier in a televised appearance last week shortly after the referendum’s results were announced, stating that the Bank of England “will not hesitate to take measures as required.” Thursday’s speech, however, was an even stronger and more concrete assertion regarding the likelihood of an actual rate cut from the current record low of 0.5%. This increased probability of monetary policy easing by the central bank this summer represents a full reversal in stance from late last year, when the BoE had been looking to tighten policy and raise interest rates alongside the US Federal Reserve. Now that this shift has begun to occur as expected after the Brexit outcome, the question remains as to if and when other central banks may follow suit, most notably the Fed.
Carney’s dovish speech on Thursday helped lead to an immediate further surge for both UK and US stocks, while the British pound came under renewed and increased pressure. For the past two days, GBP/USD had been in a modest rebound after having plummeted sharply late last week and early this week in reaction to the UK’s Leave outcome. Within just three trading days after that Brexit outcome, the currency pair plunged from around the 1.4500 handle down to around 1.3100, with the bulk of the move occurring last Friday after the referendum results were known. That drop represented nearly a 10% loss in value for sterling versus the dollar.
As noted, the past two days had seen a modest comeback for the currency pair, as sterling attempted to pare some of its massive losses. Carney’s speech on Thursday, however, quickly put a halt to the rebound, potentially foreshadowing further pressure on the pound to come. As a result, GBP/USD has fallen back down on Thursday to approach its post-Brexit low around 1.3118 once again. As that low-point represented the currency pair’s lowest level in more than 31 years, there is not much in the way of recent precedent on which to base further downside targets or projections.
What can be better projected fundamentally, however, is that the gradually-evolving consequences of last week’s Brexit decision are likely to continue placing pressure on sterling, at least in the short-to-medium term. To the downside, a key psychological support target can be found at 1.3000. Any further breakdown below 1.3000 could likely open the way for significantly further losses into the mid-to-high 1.2000’s as the negative financial aspects of the Brexit impact become more clearly defined.