Sterling continues to crack
We have not got to the point where any day ending in a ‘y’ is a negative for the pound but we are over 60% there. Of the past 50 trading days, sterling has fallen against the USD on 31 of those and 27 of those 50 have also seen GBP decline against the euro. Should GBP end the week lower than it started, it will be the third consecutive week of declines against the greenback but the eighth against the single currency.
Yesterday’s moves have pushed GBP has moved to fresh five and a half year lows against the USD and close to new 11 month lows against the euro. Since the beginning of November GBP is 5.3% lower against the euro and 6.9% lower against the US dollar.
A Witche’s Brew
George Osborne spoke of a ‘cocktail of risks’ last week when describing the world economy and a similar cocktail exists for the UK economy. The base alcohol is the weak economic data that has shown that the UK economy faltered into the close of 2015, the mixer is the poor performance of emerging markets and the inability for sterling to work as a safe haven from these and the twist of lemon is the referendum on UK membership of the EU.
While yesterday’s manufacturing data heightened the belief that Q4 growth will have slowed from Q3, it is inflation that is key for the pound through these declines.
An Unholy Trinity
Inflation was non-existent through 2015 as a result of the falls in oil prices, and thoughts leading into 2016 was that a stabilisation of commodity markets would prompt inflation to slowly drift higher as those initial declines became statistically irrelevant. December and January has seen further weakness, however, in the world of commodities, with some investment banks talking up the possibility of oil falling to $20 a barrel.
Obviously this would provide another negative impulse against inflation and lessen the need for a Bank of England rate rise. The impact of lower oil prices is global, however, and we would expect that weakness in GBP would soon be negated by similar declines in the euro as markets prompted additional stimulus from the ECB.
The mixer of emerging markets is a more difficult thing to quantify. Money must go somewhere and at the moment it is looking for a home away from emerging markets. Sterling is not a favoured port in this storm, however, with the euro, dollar and the yen being preferred because of better trade and funding dynamics. I am not looking for emerging markets as a whole to collapse per se but further flows away from China et al are not sterling’s friend at the moment.
Unpriceable risk
And finally we have the political landscape. 2014 had the Scottish referendum, 2015 the General Election and the bookies think that the EU referendum will take place in 2016. Businesses and the investment community are uncertain about how the country will vote and, maybe more importantly for sterling, scared about what uncertainty the lead in to the vote will bring. The referendum is not so much a negative for sterling at the moment – we are unable to price the risk of a Brexit purely because we have no date for the vote to take place – but it is acting as a reason why traders are unwilling to be fans of the pound at the moment.
There is little data from markets today with the gaze of traders still firmly on China and the cessation of volatility there and a bounce in oil from the lowest in over 12 years.