Since the result of the EU referendum, the UK currency has been on a downward path with occasional periods of stabilisation resulting in a bounce in its fortunes before it resumes its downward trend. October has seen a resumption of sterling’s slump as the rhetoric used by Theresa May at the Conservative Party Conference and her timetable announcement to trigger Article 50 by Q1 2017 has caused fear of a so-called ‘hard Brexit’. That remains to be seen but sterling has taken that fear on the chin.
As a result, we can expect prices of imported goods and services to rise reflecting their increased cost in sterling terms, like petrol for example. Consequently, inflation expectations are rising which, in conjunction with rumours of fiscal expansion in November’s Autumn Statement, are causing long-dated gilt yields to rise as we mentioned in last month’s mid-monthly update and referenced in our blog of 25 August, Operation Steepener https://bit.ly/2c45SVr
To get a sense of what’s happened to sterling since the referendum, it’s worth looking at the following charts. Ignoring the ‘flash crash’ that took sterling tumbling below 1.20 against the US dollar, there’s a possibility that the fall from 1.48 on the eve of the referendum to current levels in the low 1.20s might make the UK currency cheap. It will certainly help deal with the current account deficit. What’s bad for importers is certainly good for exporters and not so good for the rest of the EU. Hearing of bearish forecasts from investment banks and re-established shorts in the ‘pounded’ pound adds to the prospect that algorithms apart, sterling may begin to find a base but we are not traders and there’s much to trigger volatility in many markets on the horizon. Hope is that Clinton’s cards trump Donald’s.
For those who look at the broader performance of sterling on a trade-weighted basis, we are at levels not seen since 1990. It is also interesting to see the divergence of the trade-weighted index with ten-year gilt yields.