The sudden collapse in the value of the pound sterling against other major internationally traded currencies in the wake of the Brexit referendum vote of June 2016 attracted vast amounts of column inches at the time. It continued to do so for much of the following half-year or so.
The low came in at one pound buying US$1.1985 on 15 January 2017, says Mati Greenspan, senior market analyst at eToro, according to the social trading network’s data.
“Since then it's been rising steadily and has now just about recovered all of the losses incurred since the Brexit referendum,” he adds.
Its gradual strengthening in recent months has largely passed without comment, until, as allegedly happens with a frog in gradually boiling water, the changed temperature is suddenly too great not to have an impact.
Mati Greenspan, courtesy of e Toro
Purchasing power parity
Purchasing power parity always has a part to play in assessing the likely short- and medium-term future of any likely currency movement. The price of a Big Mac or, before that in the UK, the Mars bar chocolate confection, have long been used as handy points of price comparison.
Divide the price of the chosen item in one jurisdiction by the price in the other and the amount should be roughly equal to the current exchange rate. If not, there is often a good underlying reason, even if that is only overoptimistic or overpessimistic market sentiment.
Bearing this in mind, the price of a bottle of Moet & Chandon champagne at the Co-op retail chain in Switzerland is currently CHF39.95.
At recent exchange rates published in the Financial Times (one pound buying around CHF 1.3817 in mid-April), that equals approximately £28.91. That compares to around £36 in Waitrose, arguably middle England’s favourite retailer.
Suggests sterling is overvalued
This suggests that the pound sterling is overvalued. That in turn suggests the only way for the pound is down and it has been slipping over the past few days. But it is differing opinions that make markets and not everyone sees the evidence in the same light.
A recent note from Andy Brough, head of pan-European small companies, UK/euro small cap, at Schroders, and his colleague Jean Roche, fund manager, UK/euro small cap, includes discussion of the UK currency, addressing its recent popularity.
“If sentiment toward UK equities has continued to plumb new depths, the same can’t be said of the currency which has staged a recovery since the autumn of 2017,” they say.
They point out that sterling rebounded against a backdrop of better-than-expected macroeconomic data, the decision by the Bank of England in November 2017 to reverse its 25 basis point post-referendum rate cut and progress with Brexit negotiations.
Andy Brough (left) and Jean Roche, courtesy of Schroders
Support for sterling
A separate composite note on the first quarter issued by the Schroders investment communications team includes several pertinent comments.
Among these is the observation that sterling was supported by expectations that the Bank of England could increase base rates faster than previously anticipated, albeit the currency’s relative strength was partly a function of weakness in the US dollar.
Recent economic data, particularly on inflation and growth, combined with news of high-profile struggles in retail and casual dining sectors and dovish comments on interest rates from Bank of England governor Mark Carney, have cooled expectations of an imminent rate rise.
Miles Eakers, Market Analyst at Centtrip, notes that the pound sold off shortly after the March inflation data showing the headline figure had fallen to 2.5% from the previous month’s 2.7% were released by the Bank of England (on the morning of 18 April).