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 Tuesday 04 October 2016

PM Bulletin: Sterling lurches lower

 

 

Today sterling sliced through the lows hit in the aftermath of the UK’s referendum over EU membership. The British pound fell to its lowest level against the US dollar since June 1985. Meanwhile the EURGBP traded up to highs last seen in August 2013. The sell-off in the currency followed on from news over the weekend that the UK government will begin the formal process of taking the UK out of the EU by the end of March 2017.

Sterling had a significant reset following the Brexit vote in June this year. In the weeks following the decision to leave the EU the British pound lost around 13% against both the euro and US dollar. After the initial move sterling settled down to trade in relatively narrow ranges. From July until the beginning of this week the EURGBP had rarely broken outside of a 350 point range while cable’s high-to-low range had been around 450 points.

In some respects it seems surprising that sterling should have taken this lurch lower. The fact that Prime Minister Theresa May fired the starting pistol for the withdrawal process at the Conservative Party conference can hardly have been a shock. But what appears to be rattling investors is that the government's stance points to a "hard Brexit.” This could see the UK take back control over migration but as a consequence lose access to the single market. There is a fear that this will lead to an exodus of banks and other financial institutions from the UK, and London in particular. This would lead to falling tax receipts and a further widening of the budget deficit.

On top of this, in his first speech to the conference as Chancellor, Philip Hammond said that leaving the EU was a big threat to the UK’s economy. He also looks set to use Brexit as an excuse to boost infrastructure spending, abandoning his predecessor George Osborne’s plan to eliminiate the country’s persistent budget deficit by 2020. We’ll hear more from Chancellor Hammond when he delivers his Autumn Statement next month.

In the meantime, we’ll have to see if the current sell-off in sterling is the precursor to another downside reset or a temporary move out of the range. One thing is for sure, the weakness of the currency is doing wonders for UK corporations.  Earlier today the FTSE100 smashed through 7,000 while the FTSE250 hit an all-time record high.

PM Bulletin

David : But what appears to be rattling investors is that the government's stance points to a "hard Brexit.”

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Spread Co is an execution only service provider. The material on this page is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by Spread Co Ltd or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

 

Posted by David Morrison

Category: PM Bulletin


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