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Sterling has had a pretty miserable time this year. The GBPUSD started 2016 just a touch under 1.4750. It’s currently hovering around 1.2400 for a year-to-date loss of nearly 16%. 

https://www.spreadco.com/assets/22.11.16pm.png


As can be seen from the above chart, cable poked its head above 1.5000 on the eve of the UK referendum over membership of the European Union. This was when the pundits, polls and bookies all miscalculated the likelihood of a Brexit vote. Sterling quickly lost around 13% against both the euro and US dollar. It subsequently rebased and was relatively steady throughout the summer. However, it took a second lurch lower in early October after the Conservative Party conference. This was when new Prime Minister Theresa May suggested that the government was gearing up for a "hard Brexit.” This would be where the UK took back control over migration but consequently lost access to the single market. Then, just a few days later, sterling “flash crashed” in the Asian Pacific trading session and cable lost around 8% of its value in minutes. It bounced back as quickly as it fell although cable ended around 2 cents below its trading level prior to the crash. The sell-off saw the British pound fall to its lowest level against the US dollar since June 1985. Meanwhile the EURGBP traded up to highs last seen in August 2013.

Since then sterling has once again managed to steady.  Mrs May appears to be softening her “hard Brexit” approach and yesterday she told the CBI that the UK should seek a “transitional” deal with the EU, something popular within the City. The trouble is that many investors are wondering if the current government really has any idea how it will deal with the next stage of the UK’s withdrawal. In the meantime, the US dollar is getting support from the prospect of a Fed rate hike next month together with the expectation that US inflation will now pick up thanks to Donald Trump’s tax-cutting and spending proposals.

But tomorrow brings Philip Hammond’s first Autumn Statement as Chancellor. Back at the Tory Party conference in October Mr Hammond said that leaving the EU was a big threat to the UK’s economy. He also appeared to abandon his predecessor George Osborne’s plan to eliminate the country’s persistent budget deficit by 2020 and looked set to use Brexit as an excuse to boost infrastructure spending. However, since then Mr Hammond has insisted that any fiscal stimulus in terms of government spending would be recognised by business people as “investment.” In other worlds, we should not expect any grand spending projects - at least nothing beyond the ones we’re already stuck with - HS2, Hinckley Point and Heathrow expansion. Mr Hammond is expected to include measures to help smaller housebuilders. But he may choose to save any changes to tax rates until the Budget in March. Mr Hammond is understood to want to move away from blurring the Autumn Statement and Budget in the way that George Osborne did - preferring to focus tomorrow on the government’s spending plans and update parliament on the state of the economy. 

Disclaimer:

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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