Just as the pound was starting to shrug off the pressure on its shoulders and work on a recovery, Super Thursday happened.
The Bank of England created blues for Sterling with the currency baulking from the level of dovishness served up by Governor Carney. Interest rates have remained on hold again but Carney also said business investment was slower than it should be because of Brexit. He said “It’s evident in our discussions across the country with businesses, that uncertainties about the eventual relationship are weighing on the decisions of some businesses.”
It’s thought that weak wage growth, combined with rising inflation, has been weighing on the spending power of households also. In addition The Bank downgraded its forecast for economic growth for this year and next, compounding the pressure on the pound. A particular lowlight was the fact that the 18% fall in the pound since November 2015 has increased UK import prices and making life more expensive for consumers.
Sterling has dropped to its lowest rate since March 2010 and continues to look extremely vulnerable. Words such as ‘sluggish’ and ‘uncertainty’ were linked with Brexit during Carney’s press conference, and his candour is perhaps how most people feel. Yes, there’s a political reason for voting for Brexit, but economically it’s like turkeys voting for Christmas, and so far the consequences are proving painful. And it has generated so much uncertainty that will continue to hurt the pound moving forward, I would suggest.
Back in the Spring you could sell pounds at rates near €1.20 but that boat has sailed. There is now talk of parity for GBPEUR by year end, and that seems to me a realistic threat. If you need to buy pounds now then rates near €1.10 might look like a boat that was worth catching if we head towards parity by year end.
Luke Trevail, Senior Trader