Gloom and doom roiled financial markets when the U.K. unexpectedly voted to leave the European Union on June 27. Some market participants and government officials pleaded for a do-over, but the die was cast. In June, Bank of America's Ethan Harris, managing director and head of North American economics and others predicted the U.K. would fall into recession, and yet the pound sterling has been holding its own against the U.S. dollar and has even been up against the USD and the euro earlier this month.
Tuesday's weakness was blamed on algorithmic trading by Scotiabank's chief forex strategist, Shaun Osborne, when the GBP dipped below 1.30 against the USD.
Considering the hue and cry, the buck and the quid have not been far apart pre- and post-Brexit. Before yesterday, the GBP was weakest most recently against the USD on August 16 at 1.432 and at its strongest on November 19, 2015, when it reached 1.461.
That doesn't mean the pound sterling won't demonstrate Brexit-inspired weakness. Markets have been girding the interest rate and policy decisions expected from the U.S. Federal Reserve Bank and the Bank of Japan on Wednesday. The BOJ has aimed for 0% yields on 10-year sovereign bonds and a 2% inflation target.
The fact that these two central banks are making rate decisions at all may inject some volatility. No changes are expected at the Fed; the BOJ move was a surprise.
A dovish Fed would be positive for the pound sterling, as it would more likely move up against the U.S. dollar.
If the opposite happened, however, "Expect stocks to be sold, the Dollar to rise and the Pound to fall were the Fed to raise rates as this would be an unexpected move," said Aurelija Augulyte, senior analyst at Nordea Markets.
"I still do think that the GBP, the riskiest of the G4 (currencies), should firm more," added Augulyte. "It is still possible that the Bank of England will get a positive surprise by November," when the BoE releases its inflation report.
While Brexit has been portrayed as a sneak attack by British voters against the EU status quo that no one was prepared for, it wasn't unanticipated. According to a July survey by the London-based Institute of Risk Management (IRM), 52% of member firms polled considered Brexit scenarios in advance of the June vote. 16% said it would have a major negative impact and 20% a neutral impact. IRM has over 6,000 members; the number and the identity of respondents in the poll was not disclosed.