Don’t write off Sterling prematurely

The value of Sterling plummeted after the Brexit result, but positive long-term economic predictions suggest it will remain a strong currency into the future 

Last June’s post-Brexit vote sent Sterling values plummeting against every major international currency. It was the inevitable consequence as the market tried to price in the negative implications for the UK economy. 

As unexpected as the vote to leave was, the market reaction – perhaps overreaction – was entirely predictable. The vote was preceded and followed by a raft of analyst predictions of a weak GBP. The main fear was that Britain’s economy would grow more slowly outside of the EU. 

However, pro-Brexit economists argue leaving the EU would initially cause a downturn but result in boosting the economy later. 

Sterling recovers despite gloomy predictions 

Despite difficult Brexit negotiations and the continued uncertainty surrounding the UK’s relationships with the EU going forward, GBP’s subsequent recovery says plenty about its historical importance and longevity and that needs to be factored in when predicting its future value. 

GBP’s is the oldest actively traded currency on the foreign exchange market. It is still one of the most popular forex currencies. The result of London being one of the biggest trading hubs in the world. 

Political uncertainty and war has triggered volatility in GBP’s value over the years. However, it has always stood the test of time and has been relied upon as a global safe haven for investors. 

History seems to be repeating itself. 

Barclays foresaw Sterling recovering 

Back in March this year Barclays wrote to clients predicting a Sterling recovery against EUR and USD. 

On September 17, 2017 HSBC admitted it was wrong to predict a deep dive in the value of GBP this year. The banking giant had previously said GBP would end the year at $1.20 and around parity with EUR, their bearish currency analysts have now revised their forecasts to $1.35 and €1.12. 

The difference is that GBP is now behaving like a normal, cyclical currency and moving after things like data events. It is now less susceptible to Brexit developments. 

The Bank of England’s (BoE) announcement that a first interest rate rise in a decade sent GBP to its highest level since the day after the Brexit vote. The BoE said rising inflation and stronger household spending merited an increase in the coming months. 

UK economy looking at new markets 

BoE Governor Mark Carney, in remarks prepared for Washington today (September 19), said a long period of inflationary pressure on the UK was expected as it reorients its economy toward new markets and away from the EU. 

In the immediate aftermath of the Brexit vote and GBP’s dramatic fall in value Carney said he was happy with Sterling’s level and wasn’t averse to a further depreciation. He explained that a weaker GBP was an important reason why the economic effects of the vote to leave the EU would be less than gloomier pre-referendum predictions suggested. 

In other words, a weaker GBP was helping to limit damage to the British economy during the Brexit process. The natural reaction to ‘weakness’ is that it is to think of it in negative terms. However, certain situations warrant a weakened currency valuation. UK produce became cheaper, this stimulates demand, and helps cushion the wider economy from turmoil. 

The UK lessened the damage of global financial crisis in 2008 in a similar way. 

Economic growth and stronger Sterling predicted 

While the long-term ramifications of the Brexit are unknown Brexit supporters have consistently argued that it will result in greater potential economic growth and appreciation of GBP through a reduction of government spending and the establishment of trade alliances independent of EU regulation. 

Carney describes Brexit as a unique example of deglobalisation and while the economic effects of Brexit are subject to “tremendous uncertainty” it will mean lower immigration to the UK. This will potentially boost domestic wage growth while new trade barriers would lead to higher prices for goods and services. 

While the long-term future of GBP’s value looks safe, unpredictability is a possibility in the short-term. 

Sterling weakens in 2018? 

Upon revising their GBP valuations HSBC added that 2018 is likely to see Sterling weaken again. Their economists feel that politics will have a greater influence on GBP’s value as the deadline to Brexit nears. They offer a worst-case scenario where no deal is agreed and the economy slows due to interest rises. 

HSBC concluded that GBP would drop “well below” $1.20 and around €1.05. They now admit they might be wrong. 

There’s little doubt business fears are rising. 

More than 100 companies, including Ford, GE and IBM, wrote to Britain’s top Brexit negotiator and his EU counterpart on Sunday urging the two sides to agree a transitional period of up to three years so that they could make investment and employment decisions. 

Prime Minister Theresa May is hoping her speech will spark momentum when she visits Italy on September 22. It will a key address designed to set out Britain’s latest position. Talks will resume the following Monday. It remains to be seen how they will develop and how investors react to any developments. One thing for sure is that it will be a thrilling journey for GBP. 

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