THE ROAD AHEAD
Charles Murray, of FC Exchange, considers whether sterling is slowly but steadily moving towards recovery
October started with the announcement that Prime Minister Theresa May was setting a deadline for Article 50 to be triggered. In response, the markets wobbled. But, unlike the period immediately after the referendum result, the subsequent drop in sterling was rather small.
The pound was attempting to halt declines at the very start of the month. We saw GDP data coming in at 0.7% from a previous 0.6. But this halt was a promising situation for the pound because the service sector is the largest part of the UK economy.
Two announcements from Germany helped move our focus away from Brexit. Mid-month, Commerzbank said it would be cutting 9,000 jobs and news that Deutsche Bank would not be given government aid swiftly followed.
Brexit did not, however, stay far away from the news spotlight for too long when a flash crash hit Asian markets hard. Of all the possible causes touted by analysts and journalists, rogue computer trades or an accidental ‘fat finger’ transaction made the headlines. However the markets did rebound and trading continued without any significant change.
October’s economic data largely failed to live up to Brexit predictions, but economists are still cautious in their outlook. Of course it is still early days, and global events such as the results of the US election could trigger further slumps for sterling.
Brexit, and its ongoing impact on currency exchange rates has continued to dominate headlines in recent weeks, particularly following the High Court ruling in November which determined that the British government does not have the authority to proceed with the UK’s exit from the EU without the approval of Parliament.
Government lawyer James Eadie said it was “very likely” that MPs will be able to vote on the final Brexit agreement reached between the UK and the EU. ‘Open Britain’ – formerly known as the ‘Remain’ campaign – met this with murmurs of encouragement, although there was no noticeable market swing.
UK retail sales for September showed that consumers were still spending while inflation figures came in better than expected at 1% versus 0.7%. It seems likely that there will be no further interest rate cuts by the Bank of England (BoE), which now seems to be nudging towards its target rate of 2%.
At the very end of October, Mark Carney announced that he will remain as BoE Governor until 2019, so that he may help secure an “orderly transition to the UK’s new relationship with Europe”. This decision has sparked some positivity and relief, and gave sterling a small rally. This proved a short-lived upturn, however, as the world awoke to the unexpected news that Donald Trump was the new US president, and stocks and currency markets tumbled.
Now, it is likely there will be an extended period of flux and volatility. And, far from securing some much-needed stability, the outcome of the US election will only prolong this uncertainty some more.