As we struggle towards “deal” or “no deal”, today we consider the outlook for the once great currency that is the pound sterling. With no deal looking likely last week, and now this week being told a deal is possible, you can assume that all outcomes are priced in. The forex markets will have observed the negotiators’ every utterance, every nuance, every syllable of their body language. In other words, we shouldn’t get any surprises of the undesirable variety that so spooked markets as, for example, when the UK surprisingly voted “Leave” in 2016; when fat-fingered foreign traders fumbled a flash crash (it’s alliteration Wednesday) that same year; or when Covid-19 struck in 2020. So what might the coming days, weeks and months hold for the pound? Remember the days when a pound could fetch you more than two US dollars? In the volatility of February and March, sterling took a thrashing. When financial markets crash, as happened this year or in 2008, sterling always seems to go the same way, presumably because our economy is so geared to finance. But since the spring, sterling has been in something of an uptrend. This week it touched the highs last seen in the overnight euphoria following the Tories’ election win in December 2019 – $1.35 is the figure. Much of that climb, however, is really down to US dollar weakness.
Against the euro, sterling has been, shall we say, declining gently. While it touched €1.20 Before Covid (BC), over the last six months it has ranged between €1.13 and €1.08. Currently we sit at €1.10. The euro, no doubt to the annoyance of EU-based exporters trying to rebuild after the pandemic, is in even more of a bull market versus the dollar than the pound is. To put today’s price of €1.10 into some kind of context, the all-time high for sterling against the euro came shortly after the turn of the century at €1.74. The low came in early 2009 at €1.02 – almost parity. So today we are at the lower end of the range. On a purchasing power parity basis, fair value is probably 10c or so higher from here. The pound was a different beast in the days before quantitative easing (QE), zero interest rates, and money printing. In 2008 it got you $2.11 – imagine that! At today’s price of $1.34, to be talking of a bull market in that historical context seems absurd, but that is what we are in. $1.40 (or just below) was an extremity beneath which we never sank – with one brief exception during the miners’ strike in 1984, and the exceptional US dollar strength in the lead up to the Plaza Accord of 1985, when the G5 agreed to devalue the dollar. But here we are today below that level. We’ve been below it since 2016. Frisby’s flux still points to a bit more upside for the pound Anyway – “cable”, as the pound-dollar exchange rate is known, is more a function of US dollar strength and weakness than it is sterling. The US dollar is just so much bigger. Currently the US dollar is in a bear market – it had a limp-wristed rally in September, but since then, the bear that began with Covid has resumed.