Market News & Insights
5 October 2016

How Low Can the Pound Go?

The prospect of a hard Brexit continues to spook markets and GBP has been taking the brunt of the selling, fear the UK will be taking a hardline on immigration and Europe a hardline on financial passporting (amongst other things) has driven GBPUSD to levels not seen since May 1985, while EURGBP has rallied above 0.8800 and to fresh 5 year highs. It has not been all GBP weakness driving the Euro however, a statement from ECB officials yesterday suggesting a “consensus is being built” amongst ECB members that QE will likely be tapered, but only when the ECB decide to wind down their current program. The tapering comment shocked markets somewhat, the fact the ECB are discussing possible tapering for a program that is not due to end until March 2017, and is still has scope for expansion, likely caught the markets somewhat off guard, and is reminisce of the “taper tantrum” in the US that dragged on for several months as markets tried to predict when the FOMC would eventually begin to scale back the size of the monthly asset purchases, creating significant volatility for the USD, will the Euro now face something similar next year?

Overall risk appetite remained supported through the European session yesterday, the UK’s FTSE, which is comprised of mostly international companies, rallied as the depreciating GBP provided added value to foreign earnings potential as well as good value for investors outside of the UK. European bourses also traded higher on the day, although sentiment slowed somewhat into the US session, where good economic news is starting to be bad for stocks and while major releases were limited in the US session, the strong USD story continued with the greenback trading up .75% at one point (USD index) as hawkish Fed comments keep focus on the potential for rate hikes. The weaker JPY helped Asian markets again as risk was positive overnight, however thus far this morning there is red across the European indices and the JPY is rallying, suggesting some slight risk aversion.

GBP has depreciated almost 28% against the Euro since July last year, and some 20% against the USD in the same time frame. That is a considerable decline in a short period of time and much of the move was made before the UK actually voted to leave the EU. We highlight in the Sunday Business Post that GBP still had further to fall as the BOE eased policy and the UK progressed towards evoking article 50 and that where we find ourselves now. The eye of the storm following Brexit produced a false calm and while things returned to business as usual, with accusations scaremongering, the real storm front will come rushing in next year and that creates near term uncertainty.

This is what is currently rocking the value of GBP, however it is interesting to note that despite the US raising interest rates in that time frame, and the UK cutting theirs, the pound has still lost more value against the Euro, the currency much of the embattled EU financial system is exposed to (while the ECB has expanded their easing program as well). This creates an interesting position, is the Euro overvalued against GBP, or does the USD have to do more to gain against GBP? Focus for the pound today will be Services PMI data, PMI have remained strong the last few months and yesterday’s better than expected Construction PMI reading did little to help the pound, perhaps the services figure can help given services contributes over 75% of the UK’s GDP.

Later in the day attention will be on the US and some major releases. Markit services and Composite PMI reading, and the all-important ISM non-manufacturing are all expected to have shown improvements, but we also have the ADP employment report as well today which serves as a prelude to the employment figures due for release on Friday, which will be the main focus for markets this week. There is plenty of other data, but the above are the headlines grabbers and they alone provide plenty of scope of USD volatility.

Testimonials