A year on from the triggering of Article 50, has sterling taken a breather while investors take profits and wait for the next Bank of England move? Or, are there more fundamental economic reasons?
The pound started 2018 at $1.35 surging to a 52-week spot rate of more than $1.43 in early February – a 6% gain. Since that time the pound has retreated to $1.39. In any evaluation of sterling’s prospects you cannot ignore the B-word. The next likely big move for sterling looks likely to emerge from the EU summit on 22-24 March.
This is where three key sterling-sensitive issues will be argued: the most important one is for Theresa May to emerge from the summit with EU backing for a 21-month transition cushion, post Brexit.
On 12 March Reuters reported that a government spokesperson believed a Brexit deal was winnable for the UK. “Yes” was the answer. But there’s doubt from other sources.
23-25 March is make-or-break
Last week ex Belgian PM Guy Verhofstadt – a Brussels hardliner for the most part – said the UK’s negotiation position was unacceptable. He was referring specifically to the rights of Europeans during transition.
“Citizens’ rights during the transition are not negotiable.” For the transition to work “there could not be two sets of rights for EU citizens”.
On the face of it, an intractable position. There are other vulnerabilities for Theresa May come 23 March, including the vexed Irish border question and EU fishing rights. Goods tariffs seem to be less of a threat than they were.
Trevor Charsley from currency brokers AFEX says, short-term, Bank of England rates look likely to rise in May, which should prove sterling supportive, but the medium term doesn’t look half as perky.
“All the cards are in the EU’s hands, more or less,” he told Capital. “If you look at Article 50 they [the EU] come up with an agreement and it’s up to us to say ‘yes’ or ‘no’. They don’t really need to negotiate.”
Facing a cliff edge
He goes on: "One of the strategies the UK government has tried to follow is divide and rule, to some extent, to try and see a split in the 27 remaining nations. We heard the Dutch and Spanish finance ministers calling for a soft Brexit in November and the pound rallied very hard through that."
“So, if the government can divide and rule, there’s an opportunity [for the UK]. The issue is that the EU is seriously not allowing any dissent amongst the ranks.” On the positive side for Theresa May, Germany’s Angela Merkel has clearly said a bespoke trade deal is not cherry picking – though France is less giving on this.
But everything remains opaque. Charsley says he’s telling clients to be super-tight with hedging and to keep a close eye on the news wires. If anyone tells you they know what will happen, they’re fools, he warns.
Away from all-things-Brexit, the US dollar has strengthened on a more hawkish stance from the US Federal Reserve – the potential for raising interest rates three or four times during 2018 has seen the buck claw back losses seen at the turn of the year.
Much of this was down to 10-year bond yields, pushing up in value to nearly 3%. Investment flooded back into the greenback. But markets remain cautious: President Trump has threatened multiple trade wars, with the prospect of retaliatory measures.
“This [threat] has potential to impact the value of the dollar but could also have wider global economic implications, including here in the UK,” Daniel Stanley, head of trading at London-based foreign exchange specialists Global Reach Partners, told Capital.
Fed up, hard up
Certainly plenty of Brits still feel poor: UK February inflation came in at 3% while average earnings trailed at 2.5%. Unemployment leapt to 4.4%. The Bank of England now has a majority on the monetary policy committee in favour of rate hikes. For those on average UK earnings or below, many must feel pinched with no short-term pick-up in view.
Visa claims Britons continue to tighten their belts with the first quarter of 2018 looking the “worst on record”. High winter fuel bills are en route thanks to an unusually bitter February. So no shortage of grimness.
Meanwhile some pound traders think non-Brexit issues are becoming more relevant – at least in the last week. There’s the impact of the 13 March Budget – Philip Hammond’s borrowing bill has been cut and a new ‘turning point’ claimed; 2017 growth was revised higher to 1.7%.
Later this month there’s CPI inflation, average earnings and retail data, all due 20-22 March. Should Brexit, really, over-dominate? “The decoupling from Brexit headlines is in effect because the risks are now real and there is a growing sense Brexit won’t be solved anytime soon,” currency strategist Viraj Patel at ING Groep NV told Bloomberg on 11 March.
“So, it’s natural for investors to shift focus to other short-term factors that are actually transpiring.” Others’ are less sure. The shadow of the 23 March EU summit looms long.
If the EU does not agree a form of ‘pay-to-play’ agreement – and the EU faces budget shortfalls when the UK leaves – “it will be a ‘hard’ Brexit,” one currency source told Capital. “Then the pound could fall hard and fast again”.