UK Sterling Revisited, and a Memo to Headline Writers : In Order to Call Something a Rollercoaster, it's Got to Go Up as well as Down

Wednesday 20th January 2016

UK Sterling Revisited, and a Memo to Headline Writers : In Order to Call Something a Rollercoaster, it's Got to Go Up as well as Down

ref :- "Pound Falls to 2009 Low as Carney Dashes Early Rate-Boost Hopes" , Bloomberg Online

It won't surprise anybody to learn that most British tabloids, particularly of the red-top variety, spend little time or newsprint contemplating the machinations of global financial markets. The exceptions seem to be the occasion of a good stock market crash that allows them to trumpet just how many billions have been wiped of the value of shares, or as in this instance a perceived freefall in the British Pound. Traditionally, coverage takes the form of a visit to a frantic dealing room where journalists can wonder at (mostly) impossibly young men and women screaming and shouting as they handle eye-wateringly large sums of money. The scripts are nearly always the same, and generally refer to "rollercoaster" foreign exchange markets. They're going to need Sterling to catch a bid pretty soon, or else they're going to have to find a new metaphor. So far, the moves in UK£  have all been in one direction  --  downward.

The Pound has dropped 9 cents against the US$ in little over a month, and the 1.4130 level of yesterday and earlier today constitutes a near 7-year low. Its fall against the Euro has been marginally less precipitous, but trading below 1.30 is a 12-month low in itself. Technically and fundamentally, it's fair to say that Sterling doesn't seem to have much going for it. If you call up a chart of GBP / USD it's easy enough to see which way that's pointing, and we've read of some pretty big names revising their targets to anything between 1.33 in 3 months to 1.26 this year. We've talked about the fundamentals only recently but by way of a quick recap of the salient factors : a slew of poor economic data, particularly in manufacturing, leading to expectations of a UK rate rise being put back to late 2016 or more likely Q1 2017 ; an ever-widening current account deficit ( note : Current account deficit = value of goods, services and investment imported exceeding corresponding value of exports ) ; and of course, the looming possibility of Brexit.

Actually, strictly speaking we did see a small rally in Sterling yesterday ..... for about two hours. December's higher than expected inflation data was theoretically bullish, consumer prices (CPI)  rising 0.2% year-on-year and core CPI (ex-food and energy) up 1.4%. It turned out that most of the rise can be put down to a seasonal increase in airfares that will correct itself next month. It wouldn't have mattered had the gain been based on more solid foundations though  --  Bank of England Governor Mark Carney's thoroughly doveish speech a short time later had analysts putting a line through the chances of a rate hike anytime soon  --  futures markets suggest March 2017 is favourite, incidentally.

So not much for Sterling bulls to grab a hold of, then ? Er .... no. Except that the UK is still the best performing of the G7 nations after the United States ..... and that recent poor manufacturing data in the US has some analysts questioning whether the Fed's rate hike last month was a good idea and others suggesting we'll see only one more hike this year as opposed to the Fed's intended four ..... and that calls are growing for more monetary stimulus in the Eurozone. But it's true, persuading somebody to go contra-trend right now would be a hard sell.

Not that the authorities in the UK will mind too much about a weakening currency, as long as it's an orderly process. It certainly helps manufacturing and exports, and therefore by extension the capital account. Brexit will however remain a big, dark cloud .... though with some expecting the referendum as early as June this year, we may not have as long to wait as we thought for that seismic issue to come to a boil.