Sterling has remained under pressure in recent times, hitting fresh lows against the Euro and Dollar on a regular basis. In February, we saw it have the worst day in six years against the US Dollar, also hitting a 7-year low of 1.40, possibly eyeing the 1.35 lows we saw back in 2009. To beat those, you have to go back decades. Against the European currency, losses have been similarly catastrophic, wiping out the gains made in 2015, which was Sterling’s best year against the Euro, boasting a high of nearly 1.45, which now feels a lifetime away, not merely a handful of months.
So we must first analyse what has gone wrong for the UK to see it’s currency under such sustained, heavy fire from all angles. GDP is solid, in fact better than most other major world economies, and significantly higher than the Eurozone. Unemployment is going down, and people’s take-home pay has increased by an annual average of 3% in recent times. The only thing holding back the Pound (until recently) was the anaemic inflation number, which has remained persistently weak, fuelled by a declining oil price. This has one benefit – if people’s earnings are going up, yet inflation is near zero, it means the general population have more disposable income, as the price of buying household goods is also not rising.
However, the downside to low inflation is that it stops a central bank, in this case the Bank of England (BoE) from raising interest rates, and this is what fuels strength in a currency. Interest rate hike expectations have moved back to 2018 in the eyes of some analysts, so investors know they are going to get a poor return from British investments for the foreseeable future, thus they are moving money out of Sterling.
The new problem on our doorstep is the EU referendum, and specifically, Boris Johnson. Boris’ announcement that he is joining the ‘leave’ camp has given them a figurehead, someone more palatable to the electorate than a George Galloway or Nigel Farage figure, and bookmakers slashed the odds of a Brexit down to 2/1 – the lowest they have ever been, with some opinion polls in newspapers now predicting that Britain will indeed leave the party.
This event on 23-June provides great political uncertainty, and we don’t have to look too far into history for how severe consequences can be when a country’s currency is faced with political turmoil. In the run up to the Scottish Independence Referendum, the Pound weakened by 3% against most majors on the news that Scotland was looking to break ties. In 2010, we had the first hung parliament in a general election for a century, and Sterling dropped by over 5% on the day after the result.
Similarly, when the hung parliament was avoided in 2015, Sterling surged as investors took comfort from the fact there was going to be a stable government free of coalition infighting, regardless of whether or not they supported Cameron’s Conservatives.
As we get closer to decision day at the end of June, Sterling is likely to remain under pressure, and losses are likely to be greater against the Dollar than the Euro, which will also suffer to a small extent, as a Brexit would be bad for the continent too.
If you regularly transfer money between currencies, or have any large one-off payments to make, it is definitely worth speaking to a specialist from Cambridge Global Payments about how they can protect you from any adverse moves.
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