THE ROAD AHEAD

Charles Mur­ray, of FC Ex­change, con­sid­ers whether ster­ling is slowly but steadily mov­ing to­wards re­cov­ery

Living France - - Les Pratiques - fcex­change.com

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.

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