Don’t write off Sterling prematurely

[sakura]

Last June’s post-Brexit vote sent GBP values plummeting against EUR and pretty much every international currency as the market tried to price in the negative implications for the UK economy. 

As unexpected as the vote to leave was, the market reaction – perhaps overreaction – was entirely predictable. The vote was preceded and followed by a raft of analyst predictions of a weak GBP amid fears Britain’s economy would grow more slowly outside of the EU. 

However, amid the eye-catching headlines, pro-Brexit economists said that leaving the EU would cause a shallow downturn at first but would end up boosting the UK economy in years to come. 

GBP RECOVERS DESPITE GLOOMY PREDICTIONS 

Despite difficult Brexit negotiations and the continued uncertainty surrounding the UK’s relationships with the EU going forward, GBP’s subsequent recovery says plenty about its historical importance and longevity and that needs to be factored in when predicting its future value. 

GBP’s is the oldest actively traded currency on the foreign exchange market, it’s also one of the most popular currencies traded on forex as a result that London is one of the biggest trading hubs in the world. 

Political uncertainty and war has triggered volatility in GBP’s value over the years, but it has always stood the test of time and has been relied upon as a global safe haven for investors. 

History seems to be repeating itself. 

BARCLAYS FORESAW GBP RECOVERING 

Back in March this year Barclays, one of the UK’s most prominent financial institutions, wrote to their clients to say they could see GBP recovering against both EUR and USD. 

On September 17, 2017 HSBC admitted it was wrong to predict a deep dive in the value of GBP this year. The banking giant had previously said GBP would end the year at $1.20 and around parity with EUR, their bearish currency analysts have now revised their forecasts to $1.35 and €1.12. 

The difference is that GBP is now behaving like a normal, cyclical currency and moving after things like data events. It is now less susceptible to Brexit developments. 

The Bank of England’s (BoE) announcement that a first interest rate rise in a decade sent GBP to its highest level since the day after the Brexit vote. The BoE said rising inflation and stronger household spending merited an increase in the coming months. 

UK ECONOMY LOOKING AT NEW MARKETS 

BoE Governor Mark Carney, in remarks prepared for Washington today (September 19), said a long period of inflationary pressure on the UK was expected as it reorients its economy toward new markets and away from the EU. 

In the immediate aftermath of the Brexit vote and GBP’s dramatic fall in value Carney said he was happy with Sterling’s level and wasn’t averse to a further depreciation. He explained that a weaker GBP was an important reason why the economic effects of the vote to leave the EU would be less than gloomier pre-referendum predictions suggested. 

In other words, a weaker GBP was helping to limit damage to the British economy during the Brexit process. The natural reaction to ‘weakness’ is that it is to think of it in negative terms. However, certain situations warrant a weakened currency valuation. UK produce became cheaper, this stimulates demand, and helps cushion the wider economy from turmoil. 

The UK lessened the damage of global financial crisis in 2008 in a similar way.

 

For more detail : Don’t write off Sterling prematurely

[Juan Jaramillo]

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