Sterling little changed as Brexit Begins
March 30th: Highlights
- Resignation now official
- May looks forward while Tusk looks at damage limitation
- Traders unsure of direction for the pound
Researchers see pound as undervalued
One of the major concerns facing anyone either involved in or affected by, Brexit, is how sterling will fare over the two-year negotiation period.
Since the Brexit vote result the pound has been generally under pressure. First falling by 20% against a basket of its major trading partners currencies. Then due to that fall, imported inflation was seen rising in an economy not yet ready for interest rate hikes.
If we take yesterday’s first salvos from the two protagonists, Theresa May and Donald Tusk, the difference in their demeanour was close to staggering.
May was full of verve during both Prime Ministers question time in Parliament and following her “Brexit statement”, putting down the opposition leader in an almost “Thatcheresque” manner. By complete contrast Donald Tusk had an air of resignation, using phrases like “damage control,” “everyone loses,” “minimise cost to population, “and “remaining twenty-seven must show unity”.
There are several reports being released by bankers overnight saying that the fall in Sterling since the outcome of the vote is overdone and true value is nearer 1.33/1.35 against the dollar and below 0.8000 against the Euro.
There are still “merchants of doom” led by HSBC and Deutsche Bank who see sterling trading at 1.1000 by Christmas. This will undoubtedly be a difficult period for traders. There are no longer any one-way bets of the currency and the only certainty is that even if the pound were to be trading at 1.25 or 0.8500 by year end it will have gyrated by a much wider range than seen recently.
The reality is that it is real, it’s happening and the nine-month hiatus since the vote has been used better by the U.K. than the E.U.
Sterling building solid base
With the benefit of hindsight, it is easy to see now that since we all knew well in advance that March 29th was the day Brexit would become official, reaction was going to be muted. Traders reacted entirely predictably being inclined to let market users to dictate the direction.
Since there are undoubted influences that will drive the dollar index, the true Brexit acid test will be the EUR/GBP exchange rate. This pound finished a little stronger closing at 0.8658 following an opening of 0.8684. This was despite a spike to 0.8738 earlier.
If the negotiations that will start almost immediately are distilled down to the single market versus free movement argument, there will be plenty of room for the currencies to gyrate within what are, historically, narrow ranges.
Euro sags as monetary policy realism takes hold
Looking at the Eurozone as a whole, as the ECB must, an interest rate hike with an accompanying strengthening of the currency would spell something close to disaster for all but Germany.
In the past, the market would never have entertained talk of a rate increase, considering current conditions, in Greece, Italy, Spain or France to name but a few. The newer members of the single currency bloc would fare even worse!
It is therefore fascinating to see that commentators were prepared to believe that comments from Central Bankers could be construed as hawkish.
The ECB is clearly some way from being able to hike rates. It should be remembered that what applies to the U.K. regarding Brexit headwinds also applies to the Eurozone.
It would be glib to simply believe that since Germany wants (almost needs) interest rate hike and stronger currency to head off an overheating economy, it is responsible for the monetary policy rumour.
All it actually does is reinforce the mantra; one size does not fit all!
Have a great day!
About Alan Hill
Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.”