Brexit fears and dollar strength weighing on Sterling

Brexit fears and dollar strength weighing on Sterling

Strong employment or inflation data unlikely to help pound until Brexit uncertainty resolved as market gets jitters fuelled by collapse in Turkish Lira

A recent interest rate hike and positive economic data are unlikely to lift Sterling while no-deal Brexit fears loom. Sterling is near 13-month lows as investors favour a strong Dollar while concerns about an EU trade deal remain. The Pound lost 2% of its value in the second week of August. Investors are uneasy that Britain has yet to agree upon a relationship with its largest trading partner post-Brexit.

On August 13, Sterling dropped 0.3% to a low of $1.2735, a fraction higher than Friday’s 13-month low. The move reflected the Dollar’s rise against major currencies and fears over the collapse of the Turkish Lira. Investors worry about market contagion following the dramatic slide in the Lira and are opting for safer assets.

Reports are due this week on Britain’s employment and inflation. The data is likely to be strong, but analysts feel the overriding weight of Brexit will overshadow any announcement. Also, analysts do not expect the Bank of England to increase interest rates again until next year.

“The uncertainty of a ‘no-deal Brexit’ is likely to weigh on the Pound, and traders could remain cautious until there is more clarity around the UK’s plans post leaving the EU,” Societe Generale analyst Guy Stear told Reuters.

The dollar’s strength has also affected the Euro. This has at least helped Sterling fare better against the bloc’s currency. The Pound traded up 0.1% to 89.28 pence per Euro, above its recent 2018 lows of 90.30 pence.

BREXIT UNCERTAINTY FUELLED BY BOE GOVERNOR AND UK TRADE MINISTER

Investors are protecting themselves against further weakening of the Pound as the March deadline for Brexit nears. Most analysts still expect Britain to secure a new trade deal with the EU but until it is agreed the risk of no deal is factored in. These fears were further fuelled by this month’s warnings from BoE Governor Mark Carney and trade minister Liam Fox that the no-deal Brexit was growing.

Prior to these statements, most companies anticipated a ‘soft’ Brexit. According to Reuters, less than a third of UK companies have prepared for a ‘hard’ Brexit.  49% of 800 companies surveyed had no intention for any planning due to the uncertainty that clouds the UK-EU negotiations.

Although inflation has been stable, views for income rises are not optimistic. Despite Carney’s estimates that pay should rise, a recent economic survey suggests consumers have reduced spending as few employers plan to raise salaries.

“Household budgets are stretched,” said Visa’s chief commercial officer Mark Antipof. He also highlights August’s interest rates rise and costs for families at the start of the new school year.

“Retailers had a difficult time in early 2018, and while there was some respite in May and June, July’s fall in spending is concerning,” he added.

Traders should anticipate the Pound to remain weak against both the Dollar and Euro until clarity over what type of Brexit to expect. However, maintaining a wide perspective is essential. Friday’s (August 10) spike in Sterling’s value can be attributed directly to the Turkish lira crash.

BENEFIT FROM BREXIT UNCERTAINTY

There are two ways traders can benefit from a weak Pound. Long-term investors can choose to buy cheap Sterling with a view that its value will increase over the long haul. The short-term strategy involves following the markets closely over the coming weeks and anticipating the effect of geopolitical news as it breaks. The volatility created by political ambiguity is ideal for traders to take advantage of.

For more advice on how to take advantage of a weak Pound, talk to the experts at FXB today.

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