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Brexit stalemate implies the Sterling cannot be trusted

Publication Date: 09 May 2019 - By Jeremy Cook By Jeremy Cook
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FX & Rates Investment Strategies FX EU ex-UK UK

There’s enough hyperbole in political and market commentary at the best of times. The pound sterling has been a nightmare in the past few months – with more ups, downs and round trips than someone who has fallen asleep on the night bus after a big night out. 

However, while an extension to Article 50 has signaled the end of the nightmare for now, the forex market has to deal with the resulting hangover.

Sterling has obviously been a lot quieter, with interest dropping out of the pound following that extension agreement to Article 50 in the early hours of April 11th. This is no great surprise; Brexit and the potential cliff-edge of a no-deal Brexit has been the only real driver of sterling volatility in the past few weeks. 

Since the extension, the main question has been whether a slackening of Brexit pressures will cause UK data to start becoming more important to the pound? Currencies will always look for something to move them and in the absence of any political influence, data might step into fill that void. 

However, unless there is a monumental change in the economic outlook, then sterling is unlikely to start moving higher under its own power. 

In other words, Brexit has changed the rules on what does and does not move the value of sterling. While economic data might have moved the scales a year ago, that is simply not the case today.

The Bank of England is unlikely to move sterling

We saw as much at the most recent Quarterly Inflation Report by the Bank of England. You would be hard pushed to find the last time that Governor Mark Carney was as overtly hawkish as he was during last week’s meeting, but sterling barely paid the slightest bit of notice. Despite protests from the Governor that higher rates are needed to control inflation, which confusingly came alongside lower inflation forecasts, sterling slipped back into the morass.

The truth is that the UK economy is weak and the lack of a Brexit deal is not going to prompt businesses to spend money on new investments that boost productivity any more than it has done throughout the rest of the Article 50 process. 

We may see further rises in employment purely on the basis that businesses would rather hire and fire workers than misguidedly spend many multiples of that on capital goods. 

For the time being, the Bank of England is happy to stand back, so it is most likely that sterling will only make meaningful gains either on the weakness of others or a breakthrough in Brexit negotiations. 

Sterling has been a widow maker in the first quarter of this year and bulls may say that they are optimistic on the pound, but until the political landscape is clearer, sterling gains cannot be trusted; spikes will be sold and we believe the GBPUSD centre of gravity of 1.30 will hold for a while longer.

Jeremy Thomson-Cook is Chief Economist and Head of Currency Strategy at WorldFirst.

More from Jeremy:

One way or another: Bank of England will continue with limited rate hikes, November 6, 2018

Ignore Argentina - Turkey remains the real risk, September 4, 2018

 

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1-15 Clere Street, EC2A 4UY
London, United Kingdom

info@reachx.co
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