Currency’s tumble since April after slow recovery since the vote to leave EU a reflection of wider underlying concerns
On June 23, 2016, the British voting public stunned most forecasters by choosing to begin the process of exiting the European Union, the world’s biggest trading bloc and one the UK has been part of for more than four decades.
In the two weeks before the referendum, the British pound surged, partly on optimism of a “No” vote, to a healthy 1.44 to the dollar. But as it became clear the referendum had gone the other way, so sterling’s precipitous fall began. Seven days later it had slumped to 1.37 and over the next four months, it slid further, briefly dipping under 1.20, before starting to climb back, albeit unsteadily, to a respectable 1.42 on April 13 this year.
Since then, however, the malaise has set in once again and the pound closed at 1.2759 on Friday amid a dollar bull run that has been compounded in the UK’s case by the uncertainty surrounding the country’s official divorce from the EU next March. It was slightly lower at around 3 pm UAE time on Monday.
A 25 basis points rise by the Bank of England in interest rates to 0.75 percent last Thursday failed to halt the slide, in part because economic growth has been weak and participants see fewer rate rises in the pipeline than previously predicted.
The central bank governor Mark Carney’s openly expressed view that higher rates will provide the institution with more firepower by creating room to cut them back if Brexit goes wrong has also had a dampening effect, according to HSBC’s global head of fixed income, Stephen Major, who likened the move to an old English nursery rhyme, The Grand Old Duke of York, about a fictitious UK royal who marched his army up a hill only to march them down again.
“It is the sort of ‘Duke of York’ policy – you go up so you can go back down again,” he told Bloomberg TV last week. “It does sound a bit silly.”
Two years on from the Brexit vote, the pound is still feeling the effect of the uncertainty the referendum has created in British politics as Theresa May’s government appears no closer to reaching a beneficial trade deal with the EU.
Sterling is now at an 11-month low. Comments made last week by Mr. Carney that the possibility of a no-deal Brexit is “uncomfortably high” and will lead to higher prices were compounded by Trade Secretary Liam Fox telling the Sunday Times newspaper that “intransigence” by EU officials “is pushing us towards no deal”. He put the chance of Britain crashing out without a deal at 60 percent.
The resulting dip in the pound demonstrated how vulnerable it is to Britain’s tumultuous political arena.
It was all so different in April. A rise in sterling had confounded those who had taken bearish positions on the currency and were fearful their bets were going horribly wrong. “I’ll tell you when it was at 1.43 I was sweating … I was under massive pressure,” David Bloom, HSBC’s strategist said recently. “It was going to be a soft Brexit and the Bank of England was going to raise rates and everything was looking more relaxed.”
Five months on and today analysts across the board predict the currency will continue to be unstable as long as investors believe a cliff-edge Brexit scenario is still a real prospect, ie crashing out of the bloc without any deal.
“As long as the market perceives there is still a chance of no deal then sterling is going to be very vulnerable,” Jane Foley, head of FX strategy at Rabobank, tells The National.
Despite there being just seven months to go until Britain officially departs the EU, the two sides remain at loggerheads over what type of relationship they will have post-March 29, 2019.
At home, Mrs. May’s position as prime minister is fragile, having suffered two high-profile cabinet resignations in July from Brexiteers opposed to her plans for closer economic ties with the bloc.
“The government is struggling to get a coherent view out into the world about how Brexit is going to play out,” Russell Jones, a partner at the London-based macro consultancy, Llewellyn Consulting, tells The National.
“Recent comments from Mark Carney and also Liam Fox warned of a significant risk of a deal not being done. The feeling is that this would be pretty damaging to the UK economy and therefore people have marked down sterling as a result of that.”
The BOE raised its interest rates to 0.75 percent a few days before sterling’s latest tumble but that hike was a long time coming, almost a decade after the bank’s emergency cut to 0.5 percent following the global recession. Interest rates in the US have been rising much quicker, a sign of economic recovery, which has adversely affected the pound for some time.